This testimony was started during the Carter-era as part of the Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978. It continues twice a year, two days in February and again two days in July. These are low-probability days to trade as the market jumps every time Bernanke says one thing and, then another.

My advice is that these four Humphrey-Hawkins days are good days to take off from trading guilt-free.

But there are two reasons to keep our spirits up as much as possible:
There is a simple formula for working through such times, and
Better times are on the way

Simon’s survival formula

Those who trade with me in my Trading Den each week already know this formula for surviving times as rough as this. This is why we have been able to hold onto our equity highs throughout this taxing last few weeks.

But for those that don’t know my survival formula, here it is. The plan has three elements to it:

Trade much less frequently
Risk far less on each trade
Be patient and have faith

Trade frequency

Lets say you are typically used to finding 3 to 5 trade opportunities per day, which is about what our short term trading provides us with. In this random noise environment there are actually far fewer real opportunities than normal. Maybe just 1 or 2 per day – if that even.

However noise has this wonderful way of tricking you into thinking you can see opportunities that in reality are totally fictitious. If you are not careful you will get lured into making MORE trades than normal rather then LESS. This is why such environments are so very dangerous and the long term fate of many traders is determined by these very periods.

So my simple logic says that if the number or real opportunities are fewer per day then our number of trades per day must be scaled back. So the solution is to go into the day knowing IN ADVANCE that your number of trades will me a maximum of 50% of the number you would usually expect. Instead of 3 to 5 plan on taking 1 or 2 only and certainly not the 5 to 10 or more that the noise will try to fool you into thinking exist!

When you think you see an opportunity, here’s what you do. Get up off your chair, walk to the back of the room and look at your chart from there. If you still see a nice clear trade set up, take it. If all you see from the back of the room is noise then that is exactly what it is! Sit back down and do nothing except watch the market quickly move to the place you would have put your stop! Trust me on this after years of gathering scars to prove how misleading noise can be, I have taught this crazy little technique to many people who all swear by using this “filter” to keep themselves out of trouble.

Trade risk

Over the years I have heard many people talk about the secret to trading noisy markets is to use wider stops – to keep the stops outside of the bandwidth of the noise. Sounds logical right?

Wrong! Absolutely dead flat out wrong! Try it if you like, but in practice you will find that for the very occasional trade that you might get away with without getting stopped out there will be ten that still stop you out just for larger amounts than usual!

The big mistake in the wider stop approach is that it assumes a degree of predictability to the noise and hence the argument that you can keep stops out of reach by assessing the bandwidth of the noise. But by definition noise is UNPREDICTABLE that is why it is just random motion.

So my solution, contrary to popular opinion, is to do quite the opposite. I use stops that are much tighter than normal. I give the market about half as much room to perform as I normally would.

You might be thinking “Simon that’s crazy, you are putting you stop right in the thick of the noise so it is certain to get hit!” Yes you are right, but only if your premise is based upon the need to stay outside the bandwidth of the noise. But that is where you and I would have to disagree. My premise has nothing to do with the bandwidth of the noise, I think that is a classic red herring.

My premise is quite different – If the trade is going to work it needs to work immediately. It isn’t going to hang around. Either it does what I expect and just goes, or else I don’t want it! So in a noise environment I give any trade far less room and far less time to prove itself. Because if it hangs around – then isn’t it true that we are still just in noise and the opportunity is in fact bogus?

If it is bogus why do I want to risk a full unit to find that out, let alone a larger unit than normal? Sorry but for me if it doesn’t do what I expect immediately I just want to get out for a tiny cost and be able to say I tried but it didn’t work.

Patience

The hardest part of my formula and the hardest part of all trading is having the patience to wait until a worthwhile opportunity materialises. Gaining the skill of patience is hard work, no question about it. But let me give you a couple of little incentives to think about when you are feeling the urge to click that mouse.

If you follow the guidelines above, i.e. cutting by at least half (if not more) the number of trades per day and the risk per trade, you reduce your daily risk by at least 75%, probably a lot more. Realistically your worst case risk per week in this dangerous environment is now no more than you would be risking per day in a decent environment.

This buys you time to ride out the rough patch without doing much too damage to your capital and this is before we even talk about the option of cutting back trade size (a topic maybe for another time).

Buying time and keeping losses under control is critical for the following reason, aside from keeping your sanity…

When it all changes and comes good again, would you prefer to spend most of the good time making up some dirty great drawdown which was largely avoidable, or would you prefer those new profits to be propelling your equity curve to new highs almost from the start?

I have done both, many times, in my career and I know which one I prefer. So when I look at my short term trading results over the last few weeks and say to myself “damn it we haven’t made any progress recently” I quickly remind myself “yes but we are only a couple of decent trades off of equity highs and THAT matters!”

These are the factors I think about more and more and as you engrain such principles deeper into your mind, the easier it becomes to summon up the patience that every single trader on the planet struggles to have.

Better times are coming

As I mentioned at the beginning we will see better times again soon. Quite when is anyone’s guess.

Every time we hit these patches it feels like “this time is different it will never improve”. Yet over history it always has. Every time we see these nasty markets there is a reason why it may never recover. Every time it does.

There is no getting away from the fact that we live in uncharted times in very many different respects and there is every reason to argue that “it will never be the same again”.

Personally I believe that it will be the same again at some time, but that even if it wasn’t I would still find a way to align myself to the markets to make steps forward once again. Half that battle is avoiding taking too many steps backwards during the tough times.

I suspect the timing of the pick up will be a lot to do with the turn down in equity markets. Historically that is when volume and volatility come flooding back into not just index futures but so many other markets too.

Of course when that will be I also have no idea. It will be when it will be and when it does ranges should expand again, volume should return again and those who have followed the guidelines above will be pushing new equity highs within the first few trades.

For what its worth our longer term model is now short the S&P from the 1350 area, which may offer a glimmer of hope but there is no knowing in advance if the trade will work out or not and if it does there is no saying that this will be any sort of turning point. But it just might be the first sign that the tide is turning as we haven’t had a short signal for a very long time now.

My great friend George Kleinman taught his “secret indicator” at our seminar last summer. If you were there you might like to take a look at the daily Nasdaq chart, which is rather tantalisingly also showing a short signal there.

Will either trade turn into anything more than a scalp? Who knows, certainly not me. It’s just my job to take the trades and the market gives us what it gives us. But one day the trend will change and my guess is that will be the time that the short term trading game will come back to life once again.

Take care of your capital, try not to be too frustrated and have faith that things will get better. We’ll all ride out this storm together.

Copyright 2012 by Simon Townshend Ltd., all rights reserved

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. Simon Townshend Ltd is educational in nature and does not provide brokerage services or make investment recommendations.

When you watch this video, you are likely to be amazed that this guy actually jumps off a cliff and flies through the air.

But, that is just part of the story.

Watch the entire video and see all of the planning that goes into it and look at the after analysis. He does not “just” jump off a cliff and hope for the best.

Everything he does is according to his well-thought plan.

Success in trading requires every bit as much planning, but most traders just “jump off the cliff” with no real plan.

They just the hope that things will work out.

Of course, without the kind of detailed written trading plan that is necessary (and that I teach in my Professional Trader Mentoring Program), traders are just jumping off a cliff and hoping.

I can.

The first time I was ever in a casino, I wanted to be just like James Bond.

Of course, I was in Reno, Nevada (the biggest little city in the world), not Monte Carlo.

I did have a beautiful girl by my side (my wife) and I had invested five minutes, or so, reading an explanation of Baccarat in the little pamphlet I found on the table beside the bed in our hotel room.

So, I was ready.

My wife and I agreed to limit our investment in my pretending to be James Bond to a few hundred dollars, which we split between us.   We arrived at the Baccarat table well-dressed, confident and ready to break the bank at Monte Carlo – I mean, Reno.

As it turns out, I should have invested more time reading the pamphlet explaining Baccarat because, when I sat at the table, I did not have any idea what I was doing.

However, through no fault of my own, some of my bets seemed to work.

My wife was similarly winning some of the time.

After what seemed like a long time and many winning and losing bets, I was nonetheless out of chips. My wife gave me a few of her chips and we played for a while longer until we were both out of chips.

I suggested we adjourn to the bar so that I could get a Martini (shaken, not stirred).

At the bar, my wife opened her purse and I saw that it was filled with chips.

Unbeknownst to me, she had taken a few chips out of each winning pot and stowed them in her purse.

I was elated.

I was indeed James Bond, not some chump from the suburbs.

We cashed our chips and went to a late show where we saw Alan King.

Being smart about money in trading is just like that.

You need to take your profits off the table and play with a set amount of money.

When your account is ahead by some predetermined amount, take the money out. Trading with a larger amount of money than you planned can cause you to trade with less discipline.

Do not leave more money in your account than you need to reasonably trade.

When your account is ahead by $1,000, $5,000 or whatever you decide, give your broker a call and ask for the overage to be sent to you. Only increase the money in your account in a planned well thought-out basis and only when you are ready to increase the size you are trading.

Regularly taking money out of your account may not turn into James Bond, but, in my experience, it does help in getting the girl.

If you would like to take the gambling out of your trading, check out my Professional Trader Mentoring Program at www.professionaltradermentoring.com.

Wishing you success in your trading,

Copyright © 2009-2012 by Jeff Quinto
All rights reserved
Note: There is a print link embedded within this post, please visit this post to print it.

Attention – this just in:

My thanks to all of you who have made 2011 another successful year as we have grown together.

For me, the best part of my mentoring is that I get to help serious traders advance in their trading and along to way they become my friends. Thank you all for your friendship.

Wishing you a happy, healthy and prosperous 2012,

Hello Jeff:

This is a quick note before the year is over just to THANK YOU for a wonderful experience in 2011 and to wish you and your family the VERY BEST FOR 2012!!!!.

So far getting to know you and being able to work with you has been a great experience for me.  I am looking forward to continue working in 2012 and to keep in touch after the program is completed!

THANKS one more time and BE WELL,

Ernesto.

I had never heard Gates speak in person and I was ready to hear all about the newest software and latest technology.

Much to my surprise, all Gates talked about was what he called “data mining”.

Gates thought data mining was important. He said that by analyzing data collected throughout your business, you could find revealing insights leading to improvement.

Although I did not fully understand the importance of data mining at the time, every year since then I have seen dramatic examples of how mining the data from your trading can lead you to important discoveries.

One dramatic example of what can be mined from your trading data was evidenced by a trader in my Professional Trader Mentoring Program.  He used the time off from trading at year-end to analyze the preceding year’s records of his trades. As you might expect, he tallied his trades by month. He listed them by setup and he figured his winning percentages and losing percentages.

Lastly, he separated trades that matched his plan from trades that were impulsive and did not fit into his plan.

The impulsive trades were obviously the result of a temporary lack of discipline and nearly all of them were losers.

In his case, the lesson from looking at his past trades could not have been clearer.

Had he not done these emotional, out-of-plan trades, he would have more than doubled his result for the year. Instead of making a 15% return on equity in his trading account, he would have made almost 40% return on his trading capital.

Maybe, this was what Bill Gates was trying to tell us.

In terms of keeping records of your trading, I have two rules.

1. What you record must make sense to you; and
2. What you record must be relatively easy for you to do.

Too often traders get excited about what they can learn from their records and devise a recordkeeping system that is too complex and too time-consuming for them to continue in the long run.

This is why my advice is to settle on a minimum of what is important to record from your trades (i.e. number of trades, ticks per winner, ticks per loser, time in winners and time in losers).  Then, diligently keep track of those few items every day.

At the end of the year, say between December 19th and January 16th this year, you can go back and look over your year in trading and learn what can be learned.  With what you learn you can plan for the coming year, using the last year as a starting point in the improvement of your trading.

Why not make a New Year’s resolution to mine the data from your trading?

Who knows, you could find some easily-implemented change to help you advance in your trading in 2011.

Bill Gates would approve.

If you are committed to making 2012 the year you breakthrough in your trading, you should join my Professional Trader Mentoring Program.

Teaming up with me, you can get the benefit of my 37 years of trading experience without having to take 37 years to get it.

Wishing you success in your trading,

Copyright © 2009-2011 by Jeff Quinto
All rights reserved

They believe the deck is stacked against them.

I have a very different view of the market.

I believe the market is designed to pay you money.

I agree the market is fixed – that the deck is stacked.

It is stacked in your favor if you do three things:

• You consistently execute setups that have an edge;
• You cut their losses when you are wrong; and
• You exploit your gains when you are being rewarded.

If you start with an edge in your setups and you cut your losses and let your profits run, then the following is true:

When a trade immediately takes off in the trader’s direction, surprisingly, most traders cannot get out of it fast enough.

They cannot believe their good fortune.

You should view this favorable explosion as the norm and let the market go in your direction until the market either stalls or retraces by a preset amount.

If the market is designed to pay you money, then each trade has the potential to be a home run.

Of course, we know that most trades do not immediately explode in your direction.

When faced with a trade that does not move or, worse, drifts against the trader, most traders make excuses for the trade and think of reasons to hold onto it hoping it is still going to work.

You should do just the opposite.

A trade that does not go in your direction should be given the minimum amount of room to work and, if it does not, it should be exited.

After all, each trade is just a small probability.

It is important to keep in mind that when you are in a trade that is not working, you are not able to see the next trade which has a better chance to reward you.

In conclusion, the deck can be stacked in your favor if you just understand that:

• The market is designed to pay you money;
• A good trade works immediately and profoundly; and
• Any trade that does not work immediately and profoundly is suspect.

Wishing you success in your trading,

They think their dog remembers everything that happens.

Take my neighbor’s dog Fritz as an example.  Fritz is smart, but his short term memory is hazy at best and his long term memory is almost nonexistent.

The markets have a memory just like Fritz.

The more in the past a price is, the less likely it is to be helpful in making trading decisions.

However, just like a dog owner’s belief that his dog remembers things, many traders memorize past prices in the hope that the market will repeat itself in the future.

Traders have told me triumphantly that the market bounced off last Tuesday’s lows or rallied to Friday’s high.

Maybe it did.

But is this occasional return to a past price really helpful in making trading decisions?

After all, there are so many supposedly important price points in the past that the market is likely to randomly bounce off seemingly important points again and again.  But, how can you know which prices from the past are important and which are not?

My answer is that looking too far in the past for indications of where the market will head is wasted energy.

Instead, I believe that the market moves in waves.  It rallies and retraces and rallies again until the rally exhausts and it sells off, retracing again and again.  This is the way the market moves.  It is more likely to respect recent support and resistance than it is to care about price levels from the past.

No offense to Fritz, but the market has the memory of a dog.