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.

Thanks Andre.

“The market is like the weather, unpredictable and sometimes very volatile. The tree represents an overall position in the market and the branches, contracts in different markets. No branch is the same on a tree and similarly and, hopefully, the contracts are in non-correlated markets.

The tree is a beautiful tree providing shade for the trader and his house and it took years for it to grow to its current size.  The “house” is like a trading account. The branch breaking off and hitting the house is a small hit on the account when increased market volatility goes against you. Of course this small hit is from the market’s perspective, but to the trader it feels much bigger.

The market gave its first warning.

So, you trim back your position just like you trim back the tree. However, the weather(the market) being a fickle mistress, decides to get even more volatile and now another, even bigger bough falls not only on the trader’s fence, but also on his neighbour’s fence. The fence represents the hedge protecting a market position and therefore an account.

The market gave a second warning, this one more obvious.

The trader and his neighbour decided to join efforts to cut the tree down completely. This is like the trader and his mentor reviewing the risk in the overall position, checking that position against the “house” and deciding that it’s better to exit the entire portfolio and go to cash, rather than lose the account (“house”). This is vitally important, especially when you are trading other people’s money.

Even though a tree takes time to grow, is beautiful to look at and took a lot of effort to nurture, it is important not to get emotionally attached to it. Capital preservation in volatile markets must include a) non-correlated contracts b) position sizing c) money management d) hedging and finally and most importantly e) exiting the entire portfolio when market conditions dramatically change, before the account gets badly hurt!

The beauty of doing this is that cutting the tree down to a stump, shows you opportunities that you may not have seen previously. Growing another “tree” should not be difficult provided that you have the basic elements:

a) the seed – a good theory of trading
b) the soil – a well structured logical and simple trade plan
c) the fertiliser – determination that you will not fail
d) the water – a good mentor who can expose your strengths and weakness and help you capitalise on both.
e) the gardener – you looking after yourself and your trading business

It’s better to have a couple of broken branches and a tree stump with your “house”, than no tree and no house at all.
Do not let winners turn to losers and don’t go it alone. Even market wizards have the wisdom to know that despite their prowess, having a mentor increases their odds of sustained and consistent success.”

Best wishes,
Andre from the UK

In many professions, it is the most important thing.

(see picture at left)

However, in trading, over-reliance on accuracy can actually be destructive.

A new mentoring trader started with me last week and he showed me a strategy he had learned that generated 80% winning trades.

80% winning trades – that seems too good to be true.

Could there be a catch?

As we discussed the strategy in greater detail, he showed me the setups which seemed very reasonable – in fact the setups were quite clever.

But, then, he told me about the risk/reward of the trade and I realized that this could never work in the long run.

The way the strategy attained 8 out of 10 winners was that it employed a 4 tick target and a 12 tick stop loss.

In other words, the strategy would never give more than a 4 tick winner, but was willing to stand a 12 tick loss.

That is exactly the opposite of what I know works in the long run.

But, the problem with this strategy is not just the backwards risk/reward ratio.

The problem is that even though the strategy gives a lot of small winning trades, it will never generate meaningful profits and, importantly,  it does not have enough of an edge to overcome anything that goes wrong.

The new trader thought that his inability to make money using the strategy was because he was not sufficiently disciplined or skillful.

In fact, the problem was not him. It was with the strategy which relies on paying him small amounts when he is right and taking away large amounts when he is wrong.

Successful trading comes from putting the probabilities in your favor, not from being right all the time.

The best strategies are the ones that exploit the market when they are being rewarded and lose as little as possible when they are not working.   Successful strategies take advantage of the power of unequal profits and losses where profits end up being dramatically larger than losses.

Also, a strategy with only a fixed target, in this case a small one, assures that you never participate in the big moves.

You are just taking the chump change and letting the big moves happen without you.

I show traders in my Professional Trader Mentoring Program and my Express Program an exit strategy that leaves open the possibility of big winners because the market will sometimes deliver profits beyond your expectation if you are set up to receive them.

After all, if you are only asking for 4 ticks, the market will never give you anything more than that. However, if a portion of your exit strategy leaves open the possibility of opened-ended wins, then you are likely to have winners that pay for a lot of small losers not the reverse.

Don’t get me wrong, I understand the appeal of lots of winners.

When I go to the race track, I bet on the horses to show so that I can cash in lots of tickets. I think it is fun to turn my ticket in at the window for my winnings.

However, I am not confused in thinking that this cashing in of tickets is making me any money.

In trading, real money comes to those traders who put the odds in their favor and have winners that are dramatically larger than their losers.

Accuracy is not a bad thing.  It just isn’t the only thing that matters in trading.

Wishing you success in your trading,

Copyright © 2011, all rights reserved

Feedback from the above:

As far as the 80/20 trader goes, one doesn’t need to even look at it from a trading perspective or methodology when a simple business plan break-even analysis shows its flaws.

If he’s trading the ES, then he’d net around $3,600.00 profit from the 4 tick winners if round turn commissions are 5 bucks. And he’d lose about $3,100.00 on the 12 tick losers using the same commission rate for a pre-tax profit of $500.00. Set aside 20% for the Feds and 5% for the State of Illinois and you’re left with $375.00.

That’s enough to cover some of the fixed costs associated with running a small trading business but it won’t cover them all.

And you want to talk about risk/reward? The ES is trading in the 1330/40 range today so the notional value is over 66 grand. 100 trades in this price area is well over 6 million dollars risked for a profit of only $375.00? That doesn’t sound too appealing to me.

I’m glad he found you so you can set him straight.”   Geoff G., Lombard

As my pal Andre said today,

” The journey through accuracy is an expensive one!“

I was the favorite grandchild of my larger-than-life grandfather.

I know this because my grandfather, who everyone my age called “Da”, often took me to his weekend retreat, a log cabin in the hills of Brown County, Indiana all by myself. He never took any of the other grandchildren without their parents.

I was the favorite and I liked it

On Friday afternoons, we would drive from Indianapolis to Brown County in Da’s Rolls Royce Silver Cloud. I loved riding in the big black car and smelling the real leather. Riding in Da’s Rolls was very different than riding in my parents’ Plymouth.

Our cabin was located on Jackson’s Branch Ridge Road. Jackson’s Branch is the name of the creek at the bottom of the hill and we lived on the ridge.

When we drove up the hill from town, my grandfather loved taking a shortcut.

Laughing all the way, he bypassed the bridge over Jackson’s Branch Creek and drove the big black Rolls Royce through the creek, which was otherwise used only by farmers in their pickup trucks. At the time, I did not appreciate the absurdity of driving the Rolls through the creek.

I just thought it was great fun.

Once we arrived for the weekend, I was out the door to roam the woods in search of adventure. I would look for arrowheads, climb trees and explore the area, far and wide.

While I was making my own fun in the woods, my grandfather would be in the house reading a book, smoking unfiltered Chesterfield cigarettes and, in the late afternoon, having an Early Times and water.

Dinner was usually at our favorite local restaurant, Mid and Lesta’s where Lesta, the cook, always saved a piece of her homemade cherry pie for me. Then, it was early to bed for me so I would be ready for the next day’s adventure.

It wasn’t until I reached adulthood that I realized why I was Da’s favorite grandchild

It was not because I was the cutest or the smartest. It was because I was completely self-sufficient. All I needed was the woods and I was happy. I left early in the morning and returned from my adventures in the woods for lunch and dinner.

I did not even mind that the TV got only one fuzzy channel.

My grandfather’s success came from the paper company that he founded in 1928.

He used savings he had accumulated during the twenties to start the company. He had barely begun when the stock market crashed in 1929. An often-repeated family story told of how Da founded the company in 1928 and did not let the Depression stop him.

By building the company in what would seem to be the worst of times, he had no legacy of unhelpful habits learned when times were good. He only knew he wanted success.

He realized he gained nothing by complaining. To him, the only logical path was to take advantage of the opportunities presented to him, right then and there.

Today is very much like the early 1930′s.

Times are tough.

As a trader, this is the time to enhance your trading skills and work to build your trading account. You can be confident in knowing that when better times come you will be that much more advanced in your trading having used this time to your advantage.

You need to remain confident and optimistic and not succumb to the general malaise around you.

If you are a new trader, you can be happy for today’s tumultuous times. Learning to trade now will teach you valuable lessons that will help you build your skills, today, and be ready for the better times that will come.

If you are an experienced trader, you can use these times to trade conservatively and resolve to build your trading skills, capitalizing on today’s markets knowing that you will be ready for whatever the markets bring you.

Like my grandfather, you will be making the best of the worst of times.

Wishing you success in your trading,

Copyright © 2009-2011 by Jeff Quinto

All rights reserved

The Mount Everest analogy is meant to describe the journey from getting serious about trading, the foothills, to the start of professional trading, Base Camp One.

The first trader who talked about his journey to professional trading was Khasan from Moscow. Khasan presented a series of spreadsheets that depicted the steady improvement in his trading so far this year. He progressively increased his daily profit goals as he increased the tick count of the chart he uses to trade Eurocurrency.

He started the first of the year with a relatively fast chart, a 233 tick chart, and increased the tick count of the chart he used until today; he is trading with a 987 tick chart.

In the process, his performance has improved nicely and he is doing fewer, but significantly more profitable trades.

Khasan’s style of trading is his own variation of the retracement trade I teach traders in my Professional Trader Mentoring Program.

It is important that Khasan has taken my starting point and made his own path, his own variation. He has gone from copying me to developing his own rational strategy that reflects his personality, his experience, and his beliefs on how the market operates.

The results of his progress are gratifying to Khasan, and to me.

_____________________________________

The second trader to speak at last week’s $aturday $trategy $ession was Guillaume who is currently trading in Carnac, France on the coast of Brittany.

When he is not trading, he sails an extreme sailboat – sort of a very large sail on top of a very small boat.

Guillaume and I have worked together over the past three years. 

In the beginning, we set up the intellectual and structural foundation of his trading. 

Then, we built his skills and understanding of trading to the point that he could quit his lucrative day job a year ago. 

He, now, has been trading full time for a year.

I am particularly proud of Guillaume as I have seen him grow as a trader. 

I fully expect that Guillaume’s name will one day be well known among serious traders.

Guillaume gave an insightful presentation on the journey he has taken in the last year as a full-time professional trader.

He talked about the challenges he has faced, his failures and his successes.

Interestingly, he talked about the importance of humility.

At first blush, humility would seem to be the last thing a successful professional trader would need.

After all, was Gordon Gekko humble?

I think not?

However, Gordon Gekko was a fictional character. Guillaume and other successful traders are real.

In the real world, long term success is dependent on a healthy dose of humility to understand that you will not always be right.

You need to accept that many of your trades, no matter how skillful you become, are going to be wrong. You need to willingly, and quickly, take your losses and always be ready to exploit your gains, when your trading is successful.

The fact is that you need to mature in your trading, like Guillaume, until you are at the same time both confident and humble.

I remember when I traded on the floor and I thought that I must be getting taller because I seemed to be able to see things that I could not see before. I even imagined that I could see behind other traders. The fact was that I was not growing in height. I was growing in understanding of the markets. It just felt like I was getting taller.

Khasan and Guillaume are getting taller, not in height, but in stature and in understanding and I am pleased to have helped them as they grew.

The path from the foothills of trading to Base Camp One is long and it is hard.

But, for those traders who are willing to put forth the effort in a planned structured way, the rewards, both monetary and personal, can be significant.

Just a reminder that in three weeks, on June 25th, we will be holding our Century of Trading seminar in Santa Monica. Check it out at Century of Trading.com. Even if you cannot attend, you can get six hours of videos of the best Simon Townshend, George Kleinman and I have learned in our 100 years of trading just for the price of admission.

Wishing you success in your trading,

Copyright 2011 by Jeff Quinto, all rights reserved

Lots of traders like to use more than one timeframe to support their hypotheses and used properly such techniques can have considerable benefits.

However most proponents use relatively similar timeframes and in my opinion in doing so they are missing the true value of such an approach.

I like to use truly disparate timeframes, ones that are radically different to each other.

Copper last week gave us a timely example of this, so let’s use a real life example to illustrate the power of this often misunderstood concept. We will start with a daily chart of copper…

Our strategy gave us a buy signal at 435 shown with the red arrow, which we duly entered and we are still holding the bulk of the open position. Actually our own buy signal was in fact supported by a more traditional technical feature on this same daily timeframe…

We can see an attempted downside break from the longer term chart formation a few weeks ago. A failed breakout can often lead to a much more impressive assault on the other side. So in this case the breakout to the upside which came the day after our buy signal could be expected to perform well.

Once we had a daily buy signal its next a case of trying to limbo in at the best possible price. To see this we drop down to an hourly chart, obviously a much smaller timeframe…

After the daily buy signal we actually entered overnight with a resting order as shown by the red arrow. What can we see here on this hourly chart? Here we have a simple little bull flag providing a nice lower timeframe entry into our main daily setup.

Sadly these things don’t set up perfectly as frequently as we would all like, but we are regularly talking in the chat room about looking for hourly entries into longer term positions.

Why?

Think about it from a Risk/Reward perspective.

If you can occasionally combine the risk of an hourly trade with the reward of a daily trade – this is something to be played for any time such an opportunity shows its face!

Finally let’s look at the weekly copper chart…

Oooh! Now we have a weekly bull flag and with a little luck this may be ready to start kicking in for us.

Only time will tell.

But what I do know at this early stage is that an hourly entry into a daily set up with even the faintest possibility of capturing a weekly move – this is trading utopia and is the sort of thing that all professional traders should always be on the lookout for.

I know many traders like to use combinations of 5 minute and 15 minute charts, or hourly and 120 minute charts, etc. While there is nothing wrong with that per se, the real advantage of multiple timeframes is to be gained from the correct use of radically different timeframes.

We will be exploring the power of disparate timeframes at our Century of Trading seminar in Santa Monica on June 25th.  I will hope to see you there.

With best wishes,

Copyright 2011 © Simon Townshend Ltd.  All rights reserved.

Jeff’s note:  I am not a proponent of using multiple timeframes in the way most traders use them (i.e. comparing similar timeframes).   However, Simon’s idea of using disparate timeframes makes sense to me.  You can learn a lot from Simon’s unique trading ideas at the June 25th  Century of Trading event.  You can ask Simon anything you want during the Q&A session at the end of the day and he just might tell you something really important.