The Making of a Trader

It was 1964 and I was a brand new 2nd Lieutenant in the Air Force.  I had just acquired my new MG B model and I thought all was right with the world.  At that time I took my first step into the stock market.  The step was tenuous at best as I made a small investment in the Dreyfus mutual fund.   Contrary to the charts I had been provided on the funds history, I did not see these magnificent gains.  Not to worry as I was soon more concerned about my safety than my gains when I was “invited” to join the others in Vietnam.  During that period my attention was anywhere but on the market.   However, that experience was such that I had a new perspective about my future.  I knew if I were to have expectations of a  rosy financial future, I needed to start doing things then and not later.

That long forgotten mutual fund was still hanging around, but I knew I needed something better.  Yet, I was uncertain of how to proceed.  I bought real estate in Florida that was to be my pathway to wealth.  I was lucky to get rid of the Florida land without a loss after several years.  Then there was the venture into income properties and though they were profitable they were far too much of a headache for a military man that was likely to move at any time.  One day, I was invited to attend a seminar conducted by a broker from Merrell Lynch hoping to acquire new clients.  I found his presentation fascinating and I was very excited by the little books with the out dated charts in them.  I was sure that now I had been giving the keys to the vault and I only had to put a few dollars to work.  Much excited, I was sure Berkey Photo was going to make great gains.  It was certain as I could see it all on those little printed charts.  No you won’t find it listed today and that tells that story, but I was able to get out of it at a small profit.  Other purchases had varying results but nothing that would indicate that I knew what I was doing.  For years, I bought and held various issues and basically struggled to match the inflation rate.

Hopefully others can make use of my faulty start by avoiding it all together.  So if not stocks then what?  There was nothing wrong with stocks just the actor playing at investing.  Frankly, the stock market offers an excellent way to accumulate wealth, but if you do not have a sound plan it is also a good way to pay for others’ successes.  It has been my experience that stocks are the easiest investment to make.  People tell me they simply do not have enough money to buy stocks and they attempt trading futures which are even more difficult than stocks and require a bit more fineness to get it right.  But money makes money and everyone has to start somewhere.  The problem is not they do not have enough money; the problem is they never attempted to accumulate that money.  They were far more interested in buying things than making an investment in their future.  It does not take a lot to money to buy stock.  You can buy 1 or 2 shares with the low commission rates that are available today.  Of course, it will take a while to accumulate your wealth but everyone must start somewhere and if you do not start it surely will not happen.   I know this because once I started seeing how things were to work, I started this exact same way and I did not have the low commission rates of today.  But I persisted and I bought solid stock like IBM and over the years it grew as we now know it did.   In the early days NCR as also a good bet.   In fact, both did relatively well in 2016 but did not fare so well in 2017.  I have long since been out of both those and moved on the more aggressive stocks.

You do realize that I am skimming over the top and leaving out a great deal of pain and work it took me to gather the knowledge I needed.   But now I want to talk about that for a bit.  Trading is about understanding how the market works.  Many people think trading is easy, but the fact is, it is not.   Fortunately, it can be learned with a bit of dedication.  Like any other area of study, one must make some commitment to learning the subject.  There are as many different trading methodologies are there are personalities, but they are not all equal.  Those methodologies are based on two camps, technicals and fundamentals.  Now I realize that these are broad terms and in fact an individual generally uses a combination of each.  Here in lies the difference.  Technical traders use charts and various indicators to attempt to determine the prospects of future success.  Fundamental traders focus on things like value, ratio, volume, income, price to earnings just to name a few.  In other works they basically go over the books to attempt to determine if a stock is a good buy.   There is an ongoing debate about which is best and I am not sure there is a winner is that discussion.  However, since techinicals allow us to graphically depict the prospects of a particular issue, you will find this website concentrates on technicals.  The basis of technical trading is observing how the people who are buying and selling a stock affect the price.  Regardless of what the numbers are on the company books it is people who affect the price direction.  It is our premise that understanding that influence of the people will enable us to get a feel  of where the market is going.  You can do an internet search and find many discussions at length on both the technical side and the fundamental side of trading and thus is not my agenda here.

During my evolvement, I acquire the services of a paid mentor and I was fortunate to get one that worked with me and helped me find a way.  In the end, each trader will take what they have learned and adapt it to their personality.  It took me many  years to come to a thorough understanding of what makes the market tick.  Today I can take a simple candlestick chart and learn all I need to know.   That is only because I really learned how to read price.  I learned how to tell what momentum was doing and what price was likely to do in the future.  I could see how the bulls and bears pushed price around and I could see who was winning.  I was really excited by this and I wanted to be able to share this information with my friends.  I knew that would require years to  teach them and I had to come up with a different approach.  I decided that a series of algorithms could be constructed to depict what was happening.  Unfortunately, I could not explain to someone in a  precisely how to construct those algorithms, so I knew I would have to do it myself.  My only choice was to learn how to script and that is what I did.  From that I developed a chart display that showed much of what I was able to determine by reading price.  That along with some basic trading rules and I had all that anyone needed to successfully trade the market.  Sure there were some things that still needed to be learned, but the learning curve had been greatly reduced.

The market has been kind to me.  I was even able to avoid the massive losses many experienced in the 2008 drop.  Today I trade my own accounts, but I can only handle so much and still have a life.  So I have established a managed account with people I know that will trade based on parallel trading concepts.   Both have done well.  The moral of the story is simple.  The better your tools, the harder you work, the greater your chances are at success.

The products you see on this website are a considerable improvement over that first chart display and they are the result of a lot of work and testing with my associates.  We are pleased to share them with you and hope they will help you find your path to success.

Price Action With SRT As Confirmation

A Price Study

Price is the key to everything.  Price action will give you guidance as to what to expect for future moves.  Below is an example using the Nikkei 225 futures.

Price action 1

Note that price has been trading in a zone of consolidation for several hours.  Movement is enough that one could have actually traded the highs and lows of this consolidation.  It is very easy to see by looking at what has already happened but that offers no assurance as what to expect of the next candle.

So let us take a look at what we have and how we may have interpreted the probability of the last down swing.  To begin we know there is resistance in the area of the highs as they pretty much build a ceiling.  Previous down swings might have been difficult to predict and could have been caused us to have been caught in a whip saw action.  We can see big candles down and then again big ones back up.  Considering that this is a 9 min chart it is pretty chaotic movement.  What we seek is something a bit more predictable.

Note the arrow: At this point price is beginning to settle down.  We have a green bar close with three red bars opening at that close.  Two of the bars have long upside wicks.  These signs are indicating that be Bears are trying to control price action.  The upside wicks indicate attempts to push price up by the Bulls but having it driven back down by the Bears.  That is a sign that the Bears are in control.  On the fourth red bar a Bearish support zone is created.  The second bar to open below this zone is your signal to enter.  Since the forming bar was the first to open below the zone, the one following will signal your entry when it closes and is still below the zone.

The screenshot does not show you the final outcome but you can look it up yourself by looking at the morning price action of the Nikkei 225 on May 2, 2016.  You will find that it made a retrace and then returned to the down swing netting about 60 ticks or $350.00 for one contract.

Some may play it with an exit and then re-entry but the play is about the same as riding it to the end.  My method was to exit when price stopped moving and re-entered when a big red bar broke that low where price had previously caused my exit.

Note: The support zones you see on the chart are created by the TWSRT is a product of Testedwisdom.com.  There are specific rules that apply to use of this study and this article is not an attempt to explain those rules.

 

 

 

 

 

 

Exit Strategies Part 2

In the previous post we discussed the generalities of stops and how they can be used. We also discussed the use of stops both for loss and for profit. We discussed how each was equally important and why. In this post we are going to look at exits using other methods of establishing trailing stops. In the previous post we discussed using cycle highs and lows to establish our stops.
Cycle highs and lows for stops is but one of several methods available.. Since any method to get the exit point to follow along behind price is a trailing stop, we should discuss some of those additional methods besides cycle highs and cycle lows. In the past, I often referred to these manually set trailing stops as chase stops because it required me to manual chase after price by moving my stop. Though there are methods to accomplish that in your trading platform most methods require you to physically move that stop.
Here is a list of some additional methods that I can think of off the top of my head-
1. Zones of support and resistance
2. Fibonacci targets
3. Plus or minus price spreads from current price

Each of the above would serve the purpose of establishing an exit point. Which would be best for you is mostly going to be based on preference as they pretty much do the same thing. Using the cycle highs and lows is using history to determine if price is breaking a previous point of where it turned. Support and resistance zones are much like the cycle highs and lows with the exception it generally involves several price bars to designate that zone. The Fibonacci has its own following and that is a topic all on its own and will not be discussed here. Plus or minus price spreads are straight forward in that you are simply selecting a value to restrict price from exceeding. Each of these has advantages and disadvantages which we will discuss here.
The advantage of cycle high and cycle low method is that the point as very clear and require little to no interpretation. The disadvantage is that the amount we must allow from current price may be too much for some to bear. The concept is that price moves between these cycles and allowing it enough room will prevent us from exiting too quickly. However, that also means allowing a significant move before one is stopped out which may cause considerable loss of our profits.
Using zones of support and resistance are very similar to using cycles but they may be a bit harder to see for some to identify them. The disadvantages of support and resistance zones, other than seeing them, are much the same as the cycle stops. This may be reason that many are using the plus or minus of price method.
This price spread approach is very easy and simply uses a value to set a distance that price must move against our trade position before price stops out. This stop can be manually moved up as the bar closes and is frankly a wiser method that using automated stops. You can use your trading platform to place trailing stop exits based on a fixed amount, standard deviations or percentage of price. You can apply that against mark, bid or ask. Here is what often happens using the automated process. Since your trigger point is a specific point in price one has to consider the volatility of price. One needs to note price action in order to determine how much spread is needed to prevent premature exits and typically that is not done. That trigger point and the value attached to it is often inadequate for the fear of losing too much profit if price goes against the trade.

Here is what happens:
Note the two little read arrows. If a stop had been established to trigger off of the last price of that bar the amount would have had to be sufficient enough to prevent from being stopped out before exit strategy beforereaching the second red arrow. Often traders just visualize that price will move happily along and when it goes against the trade for more than a bar or two it is time to get out. That may be the case depending on what you objective of the trade. However, if your objective is ride the long swings you have to be willing to ride through the retraces as you see to the left. Of course one could always exit earlier and then re-enter but that still leaves the matter of when to exit.
What we have not covered is a non-traditional way of determining not only exits but it also provide an additional reinforcement for trade entries. The TW SRT is a method that plots areas of Bullish and Bearish support to clearly identify those zones that are currently active in price action. The problem with most support resistance methods is that are historical. Though that is not necessarily bad it certainly is not as good as zones defined by more current price action.
Note the next graphic that depicts the same as found on the left but with the addition of the TW SRT.exit strategy after

Note the Bearish support zone that was plotted exactly where we had determined for the charts where price continued the Bullish run. Also notice that this zone was created somewhere off of the graphic prior to price even going above this zone. Before price actually started retracing we were given the location that would determine if to exit or to continue to stay in the position. More of this is covered in the Tested Wisdom Trading Manual which can be found at the following link.
Tested Wisdom Trading Manual

About Exit- Strategies Part 1

How many times have you been in a trade that really looks good, but then begins to move against your position?  Does it make you uncertain and do you begin to feel conflicted and wonder what you should do?  Then there is the flip side where you find yourself in a profitable position and you decide to exit only to see the market continue moving much further in your favor leaving you feeling like a fool?   In this post we will explain how to simplify your exits and make them as simple and unemotional as possible.  In our previous post we discussed thebuy hold sell die impact of fear in your trades and, in fact, that is something that you must overcome before you can address trading with a level head and little emotion.  The most troublesome obstacle that will face is likely to be yourself and your emotions.  So anything that can be done to remove some of those emotions will be a huge benefit for you.

Exiting trades is hard for most traders, but it doesn’t have to be. Like most other aspects of trading, people tend to over-complicate their exits and make them a lot more difficult than they need to be. It is the ability to properly exit trades that separates the successful traders from the rest of field.  The professional traders will tell you they can pick trades with a high degree of accuracy but they cannot turn a consistent profit unless they have a manageable exit strategy.

Exits take two forms and both are equally important.  When the uninformed traders think about exits they usually have in mind a profitable exit.  You must realize that you will not win all of your trades and the key is to lose less on your losers than you make on your winners.  If your loss amounts are much lower than your win amounts you can make money even though you have only a fair winning percentage.  That method of control to protect your account while you seek further rewards is called money management also known as risk management.  Understand you will have losing trades and on some days far more than you wish.  However, if you are practicing good risk management you will live to win another day.  Risk management is topic on its own, however we will not be addressing it in this post.

I am reminded of an old song “Breaking Up is Hard To Do” in trading it would be “Making Up is Hard To Do” and it should be your song.  Losses on over leveraged trades are very difficult to make up.  You have to hit multiple home runs just to break even.  Being in the negative and trying to make it up is not where you want to be.  Another problem associated with over leveraged trades is using “hope” in a trade and thinking it will come back thus you hold on rather than exiting where you should have.  It has the same effect as a trade that is intentionally over leveraged.  Trades based on this irrational hope will cause you to loss much more that if you had exited at the appropriate point. This practice will cause you to get deeper and deeper into the trade and finally you exit at absolutely the worst time because you can stand to get any deeper in the red.  Having this false hope that the market will come back and save your trade is one of the fastest ways to blow out your account.  The emotions that are tied to that kind of trading will leave you hopelessly paralyzed to make an informed decision about exits.

question markSo what are we to do?  You must know what your intentions are on a trade before you enter that trade.  To simply take a trade and see how far it goes before you exit will likely cost you more money than the wait will make for you.  Trading the same instrument over a period of time should give you an idea of what the average swing is for the chart time you are using.  Having that information can give you not only a probably entry point but also a good stop and final exit point.

But first what kind of stop are you considering?  Will it be stop for loss or a stop for profit or you could be setting both of them simultaneously. A stop for loss is one that will never be moved, never, never, never.   Did I saw never move loss a stop for loss? Having a flexible stop for loss will be the beginning of a blown out account.  If you recalled we summarized the principles of risk management and emphasized the importance of it.  A stop for loss is one of the tools to identify your maximum risk.  Your risk tolerance will depend on your account size and how much loss you can emotionally handle.  Is a loss of $200 acceptable but $300 is too much?  Perhaps you are willing to risk $2000 for a return of much more than that.  Your reward will be definitely be connected to the risk you take.  However, that is not to say that the way to big rewards is through big risks.  The best way to explain is concelpt is to look at how price moves on different chart times.  The chart on the left is a 15 minute chart and chart on the right is a 5 minute chart.  The gray boxes represent the same period of time.

2016-01-15_124922Assume we decided to enter a short trade when price crosses below the moving average.  The two grayed areas represent the same period of time with a trade being indicated on the shorter chart first as the longer chart does not cross the moving average until later.  So it is obvious that chart times might affect when you enter a trade depending on the parameters defining that entry.  The same would hold true for exits.  Also assuming the exit signal would be triggered by a cross of moving average in the opposite direction we see the short chart is exiting much earlier than the longer chart.  But the really important thing here to remember is that same price move is occurring on both charts.  On the longer chart you would need a higher  risk before an exit would be triggered than on the short chart.  This illustrates how your risk tolerance may vary depending on what kind of trade you are looking to enter.  Another way to look at this is if you were playing the cycle highs and lows to determine entry and exits.  What might be a cycle high or low on the shorter chart is but a blip on the longer chart and yet the move is exactly the same.  Price is price regardless of the chart time.  So with that in mind, it would be prudent to see if the method you choose to establish you stops is affected by chart time.

Since we mentioned cycle highs and lows let us look at how that could be used for stops both as a stop for loss and a stop for profit.  Using the same 5 minute chart as above with the entry at the cross of the moving average let us look at how to establish stops; both a stop for loss and a stop for profit.

When we first enter the short trade we would put a stop at a previous cycle high as indicated by the arrow for entry and the stop for loss above it.  The spread between this stop and your entry is the risk you are taking on this trade.  As price moves down we achieve lower cycle highs at that point we are no longer in danger of losing money but now we start to move to preserve our profit and we set a new stop at the new cycle high and we continue this practice until price violates a previous cycle high which is our exit point.  This is a slightly more advantageous rather than waiting for the reverse cross of the moving average maximizing our profit potential.  There is a second principle that can be applied here and that is staged exits.  Whereas you could have exited 1/3 of your position on each or the previous retraces and taking the final exit at the last stop for profit.  Since you would not be liquidating your position you would only be taking partial profits at each exit.  If you did decide to do that then it might be a good target of the second candle against you to maximize that partial profit and then if it kept going until it hit your previous stop you would be that much ahead but if price  continue with the run you are still in the trade for the balance of your position.

To summarize this play of exiting the entire position at the end it equates to about 2.5 to 1 reward to risk, pretty much a minimum that we should target.  We would been better serve by placing a stop for loss not at the previous cycle high, but rather at the high of the previous bar.  With that adjusted stop for loss our ratio changes to a 4.6 to 1 a much better reward to risk ratio.  This also make it much more of a palatable trade to those with high risk aversion.  In a more volatile market you would also have a higher incidence of being stopped out as well so exactly where to place it one must deal with both aspects of higher profit or higher chance to stay till the end.

This completes part one of Exit Strategies.  Part 2 will continue with other exit strategies that one might consider.

 

About Exits-Fears

Fear is a driving emotion in most humankind, perhaps with the exception of some sociopaths.  Feeling rather certain that most of my readers are not sociopaths let us proceed.  Fear is caused by many things, some of them more recognizable as fear promoters.  Generally when we talk about fear we relate to the scary things or situations that test our courage or in childhood language being a “fraidy cat”.  But fear is much more sinister as it lurks beneath cloaked as something entirely different .  It is not uncommon that anger is promoted by fear.  A simple example would be the fear of someone having a low opinion of you thus you become angry with them.  Hence fear is cloaked as anger, but at the root is that we value the opinion of others over that of our own and we fear they are correct so we become angry with them.

bull_nad_bearThe same comparison can be made with trading as fear is at the root of many bad decisions.  How about the fear of loss?  Fear of lose is responsible for traders exiting too soon, though the reverse is also true since the fear of loss is also responsible for traders hanging on to a trade for it “to come back” and ultimately resulting in exactly what they feared.

Another fear cloaked as greed is the fear of not maximizing the gain.  How many times have efforts to maximize the gains ended up being the exact opposite?  I dare say it is more often than one would care to admit.  Greed by definition is an extreme desire for something, often more than one’s proper share.  Yet beneath the surface lies the fear of not making the most out of a trade. Because some say that is excessive then they describe it as greed.  

A third, and certainly not a “sum of all fears” ( yes, I know it is a novel and movie title) is the fear of failure.  When I speak of the fear of failure, I am not relating to the fear described above of losing money and staying in too long, but rather the fear of not being able to become a consummate trader.  When one takes on a new task the objective is to succeed.  It be foolish indeed to launch into a new career with no intention of succeeding.  Why bother it that is the case?  So, we must conclude that every trader has deep in his heart the desire to become successful as trader.  In fact, it may be their desire to use trading as the sole source of the earned income.  This fear not affects exits but entries as well.  It is truly a major obstacle to overcome.  The result if this fear varies from hesitancy of exits, exiting too quickly and even doubling down when their position goes negative.  None of these circumstances are to be desired.

Admitting that I have but just scratched the surface of the many forms of fears that affect traders, the question remains what are we to do about it.  It is very likely that a solution to any of the conditions of fear above will be a resolution to all of them.  The are certain steps the must be taken to avoid fear.  Since fear is an emotion and emotions vary from person to person those steps will not necessarily be the same for every person.  But a general framework will give one a push in the right direction.

First and foremost you must start with a trade plan.  Not something you have in the back of your mind, but a  written trade plan with every step and situation clearly identified that someone else could read and understand.  With this in hand much of what you fear will be alleviated by the solutions you have written down.  If you cannot write your trade plan then do not attempt to trade.  If you cannot write your trade rules, how can you hope to execute a proper trade entry and trade exit?  Having a hard copy trade plan will boost your confidence, particularly if you have tested it and adjusted it to fit you personality and risk tolerance.  I have often heard when I ask if someone has a trade plan, “Oh, yes of course” but when I ask for details there are so many ifs, ands and buts that no one could possibly follow it.  We cannot possibly know what the market will do at any given time, however we should know how to respond to any market condition.  By having that trade plan committed to writing you have address many of the aforementioned fears and given answers to overcoming them.  Eliminating the enough goes a long way towards eliminating fear.

Writing a good trade plan often includes the use of a trading platform or trading methodology.  One such methodology might be the TW Power Trader and the TW SRT which could form the foundation for both exits and entries.  We will in another post write about putting together a trade plan.  Also there will be following posts that address additional obstacles to good exits.