The Insightful Trader

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The Cat and Mouse Game of Newbie Traders

by on Dec.07, 2011, under Education

I recently ran across an excellent article by a young analyst at a multi-national bank,  who also trades for himself and was immediately struck by his wisdom and insight, something that many traders don’t ever achieve. With his permission, I’ve reprinted the article below from his site named Streetcoup below:

The cat and mouse game of newbie traders

by Matthew Hagemann

We are here to trade trends on a consistent basis by simply following them. An ubiquitous urge, particularly among beginners, is to predict how markets are going to evolve in a given course of time. In fact, having predictions subconsciously leads to trading them instead of actual market conditions. They become so inextricably enmeshed with a trader’s bias.

If I were to review your trades of a given day, I would probably find numerous trades coupled with little proceeds you got from them. Such activity points out that you have been trading an expectation which failed to materialize. Second thoughts forced you to close a position before the market turned against you big time.

While the market wiggles and you take one loss after another, the experienced trend follower has been staying in his position during the whole time. No action was taken at all, but yet the trend follower ends up with a more advantageous position than the one who is being assertive. Why is that so? That experienced trader listened to the market and is thus convinced of his strategy, his bias, his position, his stop, even himself. Be more convinced of yourself. To avoid fearful closing of trades, you have to know why you are opening a trade in the first place, based on objective observation of price action. What is your rationale for going long or short? Every single trade of yours should be planned out with great care.

The majority of traders who begin with futures trading, choose to scalp out of fear and are so focused on the tiny wiggles that everything looks like an opportunity. We witness this behavior in various trading forums and online chats. What’s happening is subjective trading out of gut feel and fooling oneself with regards to progress made. This getting in-and-out every minute never seemed to me a paradigm for success in the long run. Let me attempt to redirect you to the right path if you feel that you still belong to this majority of self-deceiving traders.

Trading with the trend

 The market is a master in tricking the average person. Since one cannot predict markets – or turnarounds for that matter – another plausible explanation for hyperactivity (besides prediction) is that a trader tries to catch up with the market. He missed out on the easy move down and is now at a disadvantage. Consequently, the only solution that he can think of is to buy into every spike. He is hoping to participate in the move of the century which is supposedly coming any time.

This show turns into real comedy after the market has actually turned around. Now the trader is feeling left out all over again. He subconsciously reverses his habit, and keeps shorting on the way higher. He is playing cat and mouse with the market all day long, only to lick his wounds in the end.

What is a Trend?

We need to acknowledge that markets do not move like elevators, but like waves within a current. Uptrends will always be interrupted by frequent sell-offs, whereas downtrends will witness just as many rallies. What we focus on, is the overall current in the shape of trends because this tells us the path of least resistance.

According to the Dow Theory, an uptrend is defined by a sequence of higher highs and higher lows. A downtrend is a sequence of lower lows and lower highs. Trends become most visible in the 1H time frame. Look at the ES, for example, and you will surely get a clear picture of trends that you can take advantage of.

If a market is still showing a series of lower lows and lower highs, one simply does not go long in this environment. Buying is a much more challenging proposition because a long position will most likely fail sooner or later. This is due to the strong underlying market forces that are able to break support areas sooner or later.

At some point you may be lucky enough to have caught the bottom, but is it worth it? Let’s be realistic. Even if you did catch the perfect bottom, you have most likely exited prematurely out of fear of another sell-off anyway. So much energy is expended on catching turnarounds, resulting in so little proceeds while you could have it much easier.

Trends take time to shift from bearish to bullish. You will notice a shift soon enough once sellers stop selling where they are supposed to and buyers are cracking a significant resistance area.

Alternatively, regard price action from a psychological standpoint: Imagine yourself in the position of the buyer, then in the position of a seller. What would you be thinking in each case? Would you be contented with what’s happening in the market? What would you like to see to stick with your bias? It is a chess game. This thought process is very powerful because it gives you a more objective view on the market and makes you reflect on the price action.

Listen to the Market

Beginners focus too much on the random moves intraday, than the actual trend in the broader perspective. Trade those, and you will witness far greater success. It is evident that a trader gets confused every single trading day anew. Randomness has no logic, so do not seek logic in randomness. Start looking at the forest for the trees. My favorite time frame is the 1H. I do not look at anything shorter term. Random profits also create the delusion of real progress in your trading. You get random rewards playing craps, too. But that does not mean that you know what the dice are going to do at the next roll.

To escape randomness, you must feel comfortable with holding your position over night, even several nights. It is a common misconception communicated among beginners that you need to close your trade within the same day. Trends last more than a single day. They last multiple days to weeks, sometimes months. Why? Because public sentiment does not shift from one moment to the next but takes a long time.

To trade such multi-day trends, you will need to figure out which support and resistance area is of real importance, and observe the price closely at those areas. They will stand out visibly as a trend unfolds and your eye will be trained to spot them by the time. A break of such zone is a potential entry for a new trade. By trading longer term time frame trades, you will not trade randomness, but trends that sustain themselves over multiple days. A welcome side-effect is that your broker commissions sink drastically.

Only take action if you observe clear evidence for a reversal. Otherwise you are better off doing nothing and letting the stop-loss order work for you. A stopout should happen where the original reason for your entry is no longer given due to objective observation of price action – not your gut feel.

I hope you enjoyed and take to heart Matthew’s post. It’s excellent advice for any trader. You can follow Matthew at http://www.streetcoup.com. He has many other excellent articles.

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Private Coaching Now Available

by on Nov.23, 2009, under Coaching

I’ve had some inquiries about private coaching. This is a service that I am going to start offering on a very limited basis.

This will entail setting up your charts correctly with the indicators that I use, the mental aspects of trading, position sizing, picking and executing trades, and spending the day looking over my shoulder and vice-versa as we do actual trades. This can be accomplished quite easily with Go-to-Meeting, which I will provide, which will enable you to watch over my shoulder and I yours during the trading day. If you’re new to trading or experienced, whether a day trader or swing trader, this service should get you on track to help make consistent profits.

The cost for this service is not cheap but not prohibitively expensive as I tried to make it affordable to newer traders as well as experienced. Cost for a full trading day is $500.00 or for 1/2 day – $300. However,  you may be able to recover the majority of this during the trading day, depending upon market conditions and your risk tolerance.

If you’re interested, please contact me at trader1@theinsightfultrader.com

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Familiarity Can be Hazardous to Your Trading

by on Oct.27, 2009, under Education

Those of us in the investment world, even if you’re relatively new, have always been taught that you should have a thorough knowledge of any investment you make. Though this may be true of any investments that you plan to hold for any amount of time, for short term traders I ‘d like to put forth the proposition that this may be hazardous to your short term fiscal health.

As a trading coach and a long time trader I’ve seen it many times, heck I’ve even done it myself, where your familiarity with a given stock or group of stocks leads to poor trade management. Whereas if you just happen upon a trade or a stock that perhaps someone else mentioned, then you’re much more likely to follow your signals and maintain your stops without any preconceived notion or expectations of the outcome. If the trade works, fine, if it doesn’t then that’s ok too. You followed your rules.

This first came to my attention several years ago when I started noticing certain traders who regularly traded the same given group of stocks would tend to be more lax and give a given stock more leeway or have higher expectations of the results than the trade setup suggested. Say for example Trader A likes to trade the oil stocks and he just knows oil is going up, thereby his stock should be up that day too irregardless that it’s beenup 5 days in a row, is right at a major resistance point etc. you get the picture. If you had never traded that stock in your life or could care less about the price of oil, then your expectations of a given outcome are going to be completely different and probably more objective than trader As.

I recently made the same mistake when the financials had all made a 200% move thinking there was no way they could continue. What started out as what I felt was a fairly conservative contra play using an inverse ETF and options, relatively quickly went from being a  short swing trade into a long term holding. Conviction in the market can be a killer if you’re not careful.

We all hear it and say the words, but as we all know the psychological part of trading is often more important than the actual skill set in many cases. Just remember to set up your trade parameters for whatever time frame and be adamant about following,  BEFORE you make  the trade and especially so if it’s one of your favorites.

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Simple Trendlines – One of Your Best Trading Tools

by on Mar.15, 2009, under Education

Traders of all types, whether they be intraday day traders, swing traders or even long term traders all have their favorite indicators. This is true even if they’re fundamentally inclined, much as I often am. I have friends who have charts with so many indicators in different time frames on them that you can barely see the candles. Indicator lines going everywhere in all directions.

Today’s computers with incredible computing power, not even imagined just 15 years ago and the readily available high speed internet,  let most anyone have a wealth of charts and indicators on their screens. As one of the old school, I can easily remember when all we had was a ticker and quotron machine that took up half your desk and no one was even dreaming about what’s available today. As a budding trader somewhat technically inclined, it was a big day when the new chart booklets came every month so you could draw new lines in them. And forget anything shorter time spanned than a daily chart

In those days if the stock price was above the 200MA you were bullish and if below you were bearish on the stock in general. If you were so technically inclined, and willing to work a lot of hours doing it, then you brought out your straight edge and pencil and quickly learned to draw lines on your new charts. Little 6 inch rulers worked best because the longer ones were tough to use because of the page binding in the books.

As more an more things became available, traders of all sorts quickly migrated to new technology and more and more exotic tools. The one thing that all traders like almost as much as a winning trade, are new toys, especially if perceived to give them an edge. In 2007 there was worry that there would be a serious shortage of mathematicians because all the good ones were either getting hired or starting hedge funds, each competing with more exotic and esoteric trading strategies. As is pretty obvious these days, where were they and their supecomputers in calling the top and getting everyone short, or at least out of their longs.  Whereas anyone with a straight edge, electronic or otherwise, would have lightened up, if not at 1500 then most definitely by 1400 using a simple trendline.

I’ve tried a wealth of various indicators over the years, and as each of us, have my favorites, which by the way I have reduced to just a few over the years. However, my single most favored and unquestionably most reliable is a simple trendline. Invariably if I trade against them, it comes back to bite me more often than not. The great thing about trendlines is that they work equally well in all time frames, whether it be a 1minute chart or a 20 year monthly.

Trendlines are not necessarily going to get you in at the absolute bottom or out at the very top, though an intial break of one can often come very close, in many instances, but they will surely get you in or out in time to capture the majority of the move. I’m not going to give you a course in the basics of how to draw here, you can get that anywhere, but I do encourage you, no matter what time frame you invest or trade for, to add to your arsenal. It might be the simplest and most effective tool you’ve ever used.

spx-10year-weekly-13mar09

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Links That May be of Interest: streetcoup.com - excellent articles about trading psychology and strategy thewildinvestor.com- has daily stock ...