Why Investors Should Be Careful Using Market Divergence Signals

Nearly all technical analysts of stocks and other securities make use of technical indicators to help them make trading and investing decisions.

Technical indicators are created by applying some mathematical calculation or function to the price and volume data of an underlying security. Technical analysts frequently compare the behavior and structure of indicators with the actual price and volume information. Today, I’d like to focus on market divergence signals – what are they, why they don’t always work, and some guidelines for how we can use them as active investors in today’s market.

Divergence Defined

Comparing the two lines gives rise to the concept of “divergence” – a situation where the price of a security is moving in one direction and the indicator in the other.

A significant market divergence signal is regarded as a reliable sign of a pending price trend change. For example, if the price of a security is trending down, while an indicator has started moving higher, technical analysts will conclude that the price of the security is about to reverse and start moving higher as well.

Pitfalls of Divergence

Unfortunately, market divergence indicators happen to be the most overused and poorly understood technical concept, leading many traders to make wrong decisions about the status of the market or the likely direction of a security.

In the last 3-4 years, instances of “negative divergence” have repeatedly been cited as the reason for a pending stock market top by many bearishly inclined analysts.

Conclusion

Here are some high-level guidelines for how traders should use indicators and approach market divergence:

1. Only Price Matters – Nearly all indicators are derived from price and volume information. Your trading or investing decisions should always be driven by what the price is doing, while you can use an indicator to confirm or support the decision. It should never be the other way around.
2. Know Your Indicator – If you are going to commit capital based on any indicator (even in the supporting role) make sure you understand how it is calculated and how it behaves under all market conditions. Most importantly, make sure you understand its limitations and conditions under which its reliability is suspect.
3. No Edge In Divergence –  Price-indicator divergences frequently produce false signals and should always be taken with a big grain of salt, especially in trending markets.

How to perform a multiple time frame analysis

Most traders pick their one time-frame and then almost never leave it. Or they just leave their time-frame to go down to lower time-frames to find more trading opportunities – which basically means they are recklessly hunting for signals on time-frames they shouldn’t be on.

The professional trader knows that the only way to approach trading is with the top-down approach and you’ll shortly see why.

Top-down vs. bottom-up – the biggest mistake of multiple time frame analysis

The biggest mistake traders make is that they typically start their analysis on the lowest of their time-frames and then work their way up to the higher time-frames.

Starting your analysis on your execution time-frame where you place your trades creates a very narrow and one-dimensional view and it misses the point of the multiple time frame analysis. Traders just adopt a specific market direction or opinion on their lower time-frames and are then just looking for ways to confirm their opinion. The top-down approach is a much more objective way of doing your analysis because you start with a broader view and then work your way down.

! Tip: Doing a multiple time frame analysis while you are in a trade can be a real challenge because of the trade-attachment. Once in a trade, the supposedly objective performance then turns into justifying your trade. Especially when you are in a losing trade, you have to be very aware of how you are doing your analysis; avoid justifying a (losing) trade based on the “bigger-picture” market view.

Multiple time frame analysis helps you stay open-minded

Obviously, the daily time-frame is less important if you are trading off the 1 hour time-frame. However, a trader who never leaves his execution time-frame has a very narrow view on the market and cannot put things into the right context.

Every trader, regardless of his main time-frame, should has to start his trading day looking at the higher time-frames to be able to put things into the right perspective. But looking is not enough because once you arrive at your lower time-frame and are in the midst of your trading session, you will have forgotten what you saw on the higher time-frames. There are two ways to deal with this problem:

1) Get a physical notepad

On your trading desk, place a physical notepad and for every market you trade, write down what you saw. We also offer a free trading plan template that can help you stay organized.

2) Annotate your charts

All charting platforms offer text objects and you can use them to directly write on your charts. It is also advisable to mark the areas on your chart that are your areas of interest. This way you are less likely to jump the gun and enter prematurely.

Multiple time frame analysis – step by step

When it comes to actually performing your multiple time frame analysis, you don’t have to get too fancy. But knowing what to do and how to approach it can help you build a time effective routine that guides you through your trading sessions.

Weekly / Monthly  – Where are we?

If you mainly use the 4 hour or 1 hour time-frame to execute your trades, you don’t have to spend too much time here. Basically, you just want to get a feeling for the overall market direction and if there are any major price levels ahead. Especially long-term support and resistance or weekly or annual highs and lows should be marked on your charts

Daily – Strategic time-frame

On the daily time-frame, you have to spend a bit more time on. Here you analyze the potential market direction for the week ahead and also determine potential trade areas. Again, draw your support and resistance lines and mark swing highs and lows – even if you don’t use them in your trading, it is worth having them on your charts because they are so commonly used.

4H (1H) – Execution

Assuming that the 4 hour is your execution time-frame, this is where you map out your trades and specific trade scenarios. Take the levels and ideas you came up with on the daily time-frame and translate them into actionable trade scenarios on the 4 hour time-frame.

Ask yourself where you would like to see price going, what has to happen before you enter a trade and what are the signals you are still missing.

Staying open minded – 2 tips

Always create long and short trade scenarios when doing your multiple time frame analysis. This will keep you open-minded and it avoids one-dimensional thinking. A trader who is only looking for short trades, will blank out all signals that point to a long trade. Or, a trader on a long trade will miss the signals that could signal a reversal.

Furthermore, separate your charting from your actual trading platform. If you can see your open orders on your screens during your analysis, you are much more likely to be biased during the analysis

The First 12 Questions for a Trader to Answer

1. What time frame will you be trading in? This establishes your needed screen time.
2. What will be your specific entry signals? What price action or technical indicators will get you into a trade?
3. What will be your specific exit signals after entry? Stop loss, trailing stop, or price target.
4. How much are you willing to lose per trade?
5. What risk/reward ratio are you looking for in your trading?
6. What win percentage do you need to be profitable with your risk/reward ratio?
7. What are the probabilities of a draw down with your win/loss probabilities and risk per trade?
8. How many trades a month do you need ideally to hit your annual return goals?
9. How much will your commission costs for your trading activity level be as a percentage of your account monthly?
10. Do you have a trading system?
11. Do you have a complete trading plan?
12. Can you follow your plan and system with discipline?

Trading Mentor : How to choose and why?

“There are two ways to receive wisdom: mistakes and mentors” – Mike Murdock

Just ask yourself "Are you still willing to make more mistakes or its a time to choose right Trading Mentor?"

If you are willing to repeat the same mistakes over and over again you are free. But if you are looking for the second alternative then let us guide you on that.

If you look up “mentorship” on Wikipedia you will find the term defined as, “a developmental relationship in which a more experienced or more knowledgeable person helps a less experienced or less knowledgeable person—who can be referred to as a protégé, or apprentice — to develop in a specified capacity.” The advantages of learning any skill or trade from a mentor are numerous. Some of these include; a drastically reduced learning curve, faster achievement of long-term goals in the given skill or trade, reduction in time spent doing trial and error, more personal time, greater emphasis on the more important aspects of the given skill or trade, the list of benefits that you reap from employing an experienced, credible and knowledgeable mentor in any field are almost limitless. That being said, not all mentors are legit, especially in the world of trading, so when looking for a quality Trading mentor we need to look for specific characteristics that make them credible.

The value of learning a skill from a mentor

There are a few different ways that we as human beings learn a new skill or acquire more knowledge; one of these is self-education, many people teach themselves how to play an instrument or how to cook. Usually things that people self-educate themselves in are intrinsically satisfying, meaning they provide a person with an internal sense of gratification and achievement. Our natural talents in certain skill sets prime us to self-educate ourselves in skills that are most gratifying to us. Another way human beings learn is through a systematic education, via a public or private school. This type of learning is acquired from taking instruction from someone that is certified to teach material on a specific subject. Once we complete enough course work in a variety of subjects we attain a diploma or college degree that symbolizes our mastery in a particular field of knowledge. However, a college degree is not always synonymous with a specific industry-related skill.
It is the acquisition of a specific skill set that makes an individual employable, whether its employment with a company or self-employment. Even if you do have a college degree most job-specific skills are acquired via on-the-job training from a person who has the experience to train you in the specific job you are learning. A person who takes you under their wing and trains you for a specific skill is considered a mentor. Generally a mentor will train someone based on their own experience in the field, this means that a mentor has already made all of the mistakes any beginner will make and has learned the tough lessons that accompany any worth-while endeavor.

Why you need a mentor to help you learn how to trade

In trading, more so than other fields, there are numerous mistakes that most beginners make, and they usually end up making many of the same mistakes over and over. So by getting taught the intricacies of trading by someone who has already traveled down the rough and rocky road that all novice traders must take, you can essentially make your journey to  trading success a great deal smoother than those that refuse to get mentored by a Trading professional. In  trading, almost all of the early mistakes you will make result in you losing money, this is a big difference from most other professions, which is why having a credible and experienced mentor in the world of trading is so critical to your success as a trader.
Unless you are a total beginner to trading and this is your first day reading about trading strategies then you no doubt have realized that there is a jungle of stocks and other trading related information available for you to digest. Some of it is quality information; the great majority of it is someone trying to make a quick buck preying off of less knowledgeable peoples’ hopes at making money in the markets. The amount of trading information and different trading courses for sale by people of questionable credentials can actually seem quite over whelming to someone that is relatively new to the world of trading.
So, if we can agree that we definitely will greatly benefit from a mentor,then our next logical step would be to seek out a credible and experienced mentor, preferably someone who practices what they are preaching to you, offers on-going support, and is able to easily be contacted whether through email or phone. The bottom-line is that someone who is just out to make a quick buck and does not care about their own reputation or the morality of their actions will not have any of these previously mentioned characteristics. So let’s dive into what exactly you should expect from your Trading mentor.

What you should look for in a trading mentor

The first thing a mentor should do is help you believe in the trading method they are teaching and gain confidence that it’s worth learning, so that you can then commit to it and study it. You obviously want your mentor to fully believe in the method they are teaching you and to be an active trader of it. This is important, because if a mentor cannot properly describe his or her trading method to you and make you believe in it like they do, it pretty much shows that they don’t believe in it themselves, or trade it.

A cold hard fact of trading is that whether you are trading Forex, stocks, or commodities, trading is one of the most difficult endeavors to properly wrap your mind around. Many so called “market gurus” or “mentors” do not actually trade for themselves, they have long since given up on trading and decided instead to take the low road and sell something to people that they themselves do not believe in. If your Trading mentor is truly a trader him or herself, they will have no problem discussing specific trades with you via email, answering your questions about specific trading setups, or giving you their current view on a market.
The next big question we need to ask about our mentor is do they practice what they preach? Do they trade the same exact way they are teaching people to trade? A mentor that provides their students with a trading discussion forum or daily market commentary where they give you regular market insights and updates, is definitely something any legit mentor should do. This shows that they are currently active in the market and connected to it with passion, any trader or mentor worth a grain of salt will provide this service or something similar. The bottom line here is that any credible and legitimate mentor will be trading the same way they are teaching, if their strategy is truly effective and worth learning.

In closing

The importance of finding a credible and experienced Trading mentor can not really be emphasized enough. There is so much misleading information in the Trading world that it really can be a chore just to separate the genuine mentors from the charlatans trying to take your money and run. If your Trading mentor meets all of the criteria discussed in this article then they are most likely legit and will help you get on the road to consistent profits much faster than if you go it alone. At Dev Advisory Services, we believe we fulfill these important requirements that are crucial to a trader’s learning experience and trading career in general. Don’t take our word for it..just check out our consistency and accuracy on our Facebook Page Dev Advisory Services where we keep posting our views and also on twitter @devadvisory9939.

The 7 Habits of Highly Profitable Traders

Here are seven simple ways to move into the top 10% of traders that are profitable long term. 90% of traders do not do these seven things, you can start to do them tomorrow with the right homework and diligence.

1. Profitable traders are trading a winning system based on buy signals and sell signals that create good risk/reward ratios based on historical price patterns.
2. Profitable traders have trading plans. They know where they are going to buy and sell if they have the opportunity before the trading day begins.
3. Profitable traders trade with a position size that does not put their trading account or lifestyle in danger if it is a losing trade.
4. Profitable traders are always looking to go in the direction of the trend for their time frame, the path of least resistance to profits is their goal.
5. Profitable traders are able to be contrarian and buy breakouts and sell breakdowns short They can also buy fear and sell greed when their system says it presents a good trade opportunity.
6. Traders that trade price action instead of their opinions can be very profitable because they are not trying to beat the market they are trying to follow it.
7. Traders that trade their predictions, opinions, and egos for listening to what the market is saying through price action can make money over the long term.

Profitable traders trade profitable systems with discipline and the right position sizing while unprofitable traders look for predictions and trade too big, too much, and too randomly.

The Psychology Behind Casinos And The Stock Market

Traders don’t like it when their profession is compared to gambling (and vice versa) because they believe that in trading skills determine if you come out ahead, whereas gambling is seen as a pointless endeavor where skills do not exist and only the desperate people are hoping to hit the jackpot.
However, in today’s world, the stock market has become a topic that you can read about in the news daily or watch 24/7 TV coverage of what is happening in the markets around the world. The way the stock market and trading is displayed and talked about has shifted significantly from sophisticated investing to sensation driven entertainment.
The implications of such a presentation and the impacts on the mindset and on the trading approach can be significant, without people even knowing how and why their trading decisions are being manipulated and impacted. The following article has been inspired by a chapter from the book “The indomitable investor : why a few succeed in the stock market when everyone else fails” where the parallels between the world of casinos and the stock market are compared.

Casino vs. Stock Market

Casinos:
When people go to the casino, they often have a very detailed game-plan about how disciplined they are going to play, what their risk limit is, how much they are willing to lose at most and plans about leaving with more than what they came with. However, the casino managers are aware of the ‘preparation’ of the average gambler and they found ways to trick them into abandoning their good intentions.

• Free alcoholic drinks to seduce people to take more risk than what they had planned
• Women and other attractions to create arousal and to stop people from thinking too much about risk and potential losses
• Bright and flashy lights and sounds to create a casual atmosphere with lots of excitement
• Everything in a Casino is designed to make you want to spend your money, often created by professionals with a psychological background, including odors, sounds, patterns of the carpets, etc.
• Casino chips are used to make you forget you are actually playing with real money

The Stock Market:
Although trading and investing is a very hard thing to do successfully, the way the media presents investing in the stock market is comparable to a large scale casino where the only goal is to create attention, excitement and awaken the hopes of people who are looking for a fast buck. The following attributes of the mainstream media and trading websites often create a wrong impression of trading and can be the cause of a negative trading performance:

• TV channels and newspapers use attention grabbing headlines and slogans to attract people
• Pictures and photos of young , rich men are used to awaken hopes and dreams of a certain clientele
• The hosts of investing shows have often little to do with sophisticated investors, but are very emotional to draw a lot of attention
• If there are extreme rallies you can read and hear about it everywhere and you can witness that even  ‘the average Joe’ now suddenly sees himself as an investor

Research on investor behavior and media coverage

The fact that financial media and the media coverage is impacting investor behavior is widely researched and 3 findings stand out which highlight the impacts of financial media:
1) Attention-grabbing events lead active individual investors to be net buyers of stocks.
2) Individual investors are more likely to trade an S&P 500 index stock after an earnings announcement if that announce­ment was covered in the investor’s local newspaper.
3) Investors who have never previously owned a stock are more likely to buy when stocks reach upper price limits such as all-time highs.
You can read more about research findings and find the respective references in our other article.
Taken together, these three findings show that the media has a big influence on how the average investor makes his decisions. Furthermore, even if you think that you make your decisions completely independent, being exposed to very emotional and convincing reports or announcements can lead to trading decisions that deviate from your original plan. The next points will show how a trader can protect himself from such negative influences.

Implications for your own trading and tips to counteract the outside influence

#1 “Think slow to think at all”

Before you make a decision, think about what caused to you think in a certain way. Before entering a trade, ask yourself whether the trade idea is based on sound principles and your trading rules,or did get you the idea from an outside source? To be profitable over the long-term, a trader has to make his decisions self-determined and based on his own research.
“Give a man a stock tip, and you feed him for a day; show him how to trade, and you feed him for a lifetime.” – Modern_Rock

#2 Who do you engage with during trading?

It is OK to interact with other traders and talk about experiences or personal views. But during trading sessions, traders should be somewhat isolated. Being active in forums, trading chat rooms or listening to financial news can influence your own decision making process. Amateur traders often look for outside confirmation when a trade goes against them and then they ask other traders, often with completely different trading methodologies, why a trade is still good.
“When a trade goes wrong if you’re looking for confirmation bias instead of hitting stops, you don’t have the mental strength to be a trader.” – Assad Tannous

#3 Check your surroundings

As we have seen above, the atmosphere in casinos can have big impacts on how we perceive risk and act in situations. Therefore, be aware of the music you play while trading and avoid anything that is too arousing – some traders report that they listen to classical music during trading sessions to keep their level of arousal low. Do you really need to have CNBC running at all times? To bypass periods where nothing happens, do you watch funny YouTube videos or engage in any other activity that could have an impact on your mood?
This point might sound over the top, but everything around us, and the activities we engage in have a direct impact on how we perceive risk and make our decisions, even though we might not be aware of it at first glance.

#4 The colors on your chart

Although I wasn’t able to find a piece of research about this topic, it can be assumed that the colors we use in our trading platforms impact how we perceive the current price development. All our lives we are primed to respond to the two most commonly used signal colors red and green. Whenever we see green, it means go and everything is good, whereas red signals an immediate stop or danger.
Are traders more likely to engage in impulsive trading decisions when they are currently faced with a big green or red candle? Very likely. Are you more likely to close a buy trade when the current candle is red? Possibly. Even if the impact is minor, a trader should grab every possibility to put the odds a little more in your favor should be embraced.

The Real Reason We Trade Emotionally

 We'll give you a view you won't hear from any mentor, coach, guru, or furu.

Why do so many traders talk about trading being a mental game and making bad trades because of emotions? Why do you find yourself making the same mistakes again and again, making money only to lose it?
Is it because you lack discipline? Is it because you cannot control your emotions? Is it because you don't stick with a trading process?
No.
You have emotional problems in markets because you're the market's bitch.
You heard me right, Mr. Independent Trader who doesn't want a 9 to 5 job and wants to only work for himself. You're the market's bitch.
From open to close, you're hanging on every market tick, letting it sway your thoughts and feelings.
When the market treats you well, you feel good. When it treats you poorly, you feel like crap. When the market's not moving, you don't know what to do.
If you behaved that way in any relationship--with your boss at work or your spouse at home--everyone would see that you're someone else's bitch. But with markets, you tell yourself it's dedication, it's a passion for trading.
Bullshit. You the market's bitch.
You have a relationship with the market and anytime you're controlled in a relationship, you're the bitch.
The only way to have an even relationship with the market is to control when you play, so that you don't get played.
That takes rules, that takes finding and sticking to edges--and it takes the willingness to not play when your edges aren't screamingly apparent.
What you got ain't passion for trading; it's a need to play.
If you need to play, you're going to get played. You're going to be controlled by market behavior. You're going to be the market's bitch

A simple hack for better trading decisions

What separates the professional trader from the amateur? It is not that the professionals use better indicators, they don’t have a secret method to time entries or know how to call tops and bottoms perfectly. In fact, the difference between good traders and struggling traders usually comes down to a few, very specific points. The concept that can help improve the trading performance of amateur traders significantly is called “Ask yourself: What would the professional do now?”
Just think about all those trades you KNEW you shouldn’t be in, but you entered anyway. Or, how often did you do something with your trade and deep inside knew that it wasn’t the right thing to do? Most of the time, traders would be much closer to profitable trading if they could just stop making bad trading decisions and repeating mistakes.

Before doing anything, ask yourself…

…what would the professional do? The next time you want to break your trading rules and open a trade early, ask yourself if a trader who consistently makes money would do the same. Or, when you see price approaching your stop loss order, would the professional and winning trader really widen his stop loss and risk taking a much bigger loss instead of just accepting that his trade idea was wrong and it’s time to move on to the next trade?
Traders who start operating in such a mindset question their trading behavior constantly and are able to differentiate between positive and negative trading behavior. It is obvious that a professional trader would often act completely different from you and by consciously questioning your trading decisions, you will be able to avoid many of the common mistakes.

Before making a trading decision, pause and reflect. Ask yourself: What would the professional trader do now? Should I really do what I am about to do? Will it help me become a profitable trader?

The 6 deadly sins of amateur traders

It is not a secret why the majority of traders struggle. After you have acquired a good understanding of how trading mistakes manifest in your trading, you have a greater chance of avoiding them in the first place. The following points describe the 6 greatest error sources for traders:

#1 – Breaking entry rules
It all starts here. Even when following precise entry criteria, traders often enter trades too early and don’t wait for confirmation. Or, they enter trades too late and chase price because they did not trust their method when the signal occurred.

#2 – Violating risk management principles
Taking positions that are way too big is a very common problem among traders. When your position is so big that a loss would have a significant impact on your overall account, you are more likely to make emotionally caused mistakes.

#3 – Bad in-trade decisions
Once in a trade, the problems don’t end. The most common trade management errors are trailing stop loss orders too close behind current price, watching your floating P&L constantly with every tick and randomly moving around your target and stop orders without following a clear plan.

#4 – Exiting without a plan
Trade exits are often neglected and traders don’t understand the importance that trade exits have on their performance. The most costly trade exit mistakes are closing winning trades too early and missing out on potential profits, closing a winner too late and giving back profits or letting a loss run beyond the original stop loss. Trade exits are an important cornerstone of profitable trading. Interfering with exits usually costs traders a lot of money.

#5 – Not learning from mistakes
Be honest to yourself and think about how often you repeat the same trading mistakes over and over again? But why is it that traders don’t learn from past mistakes? Most traders just close their trades and will never look at them ever again. Without a review process in place, improvement is almost impossible. If you are not aware what you did wrong and what caused your loss, how can you expect to become a better trader? Professional traders operate in a growth mindset and they are constantly looking to improve.

#6 – Changing systems
Imagine Paul Tudor Jones, Marty Schwartz or Jesse Livermore and think about their approach to trading. How likely is it that those top traders would jump from system to system week after week, try a new indicator every few days or buy trading robots or EAs that promise making money effortlessly? It is absurd to think that the professional got to where they are by jumping from one system to the other without ever really committing to one thing. Do you still think that you will stumble over the one system that will just work miraculously?

We suggest you write down the phrase “What would the professional do now?” and put it next to your trading desk. The next time you are about the make a trading decision that you think you shouldn’t be making, take a look at the phrase and re-evaluate your action.

How far has breaking the rules and repeating the same old mistakes brought you so far? If you are still not seeing the results in your trading you are after, it is time to take a different approach. No professional trader got to the top by breaking his rules, manipulating his orders or gambling with risk.

Why Bear Markets Steamroll Bulls

Having a bull mindset in a bear market is not profitable. Bear markets have no long term support, they can make lower lows for a long time. Buying pullbacks is not profitable in bear markets because pullbacks turn into downtrends, and old support becomes the new resistance.

1.  Buying dips stops working. Bulls end up getting trapped at higher price levels, unable to profit from rebounds because they are waiting to break even.
2. Momentum entries fail to be profitable. Rallies are usually chances for shareholders at higher prices to sell their shares and short sellers to take new, short positions.
3. Perma-bulls confuse short covering rallies for bounces off a bottom. They are dead cat bounces that will later make lower lows.
4. Perma-bulls stay long into 10% corrections and think the sell-off is over, but end up staying long through the 20% upcoming bear market.
5. The perma-bulls fail to understand that when equities are under distribution, all stocks go down regardless of the underlying business and fundamentals.
6. Stock markets go down when the majority is primarily long and the market runs out of new buyers.
7. 10% corrections and 20% pullbacks into  bull markets are normal; 2012 – 2015 price action is abnormal.
8. All markets can trend in two different directions; you must stay flexible. Perma-bulls only think that stocks will go higher.
9. Margin debt and leverage are great vehicles for creating bubbles, but they have their limits.
10. The central bank can create bubbles, but they can’t sustain them forever.

Advanced Stop Loss Guide

Why you should not trade without a stop loss order

The stop loss order is not only completely misunderstood, but also has a much worse reputation than it should have. Here are only 4 of the many reasons why a stop loss should be valued highly by any trader and a trade should not be entered without one:

1) It helps you to determine position size

After you have identified the stop loss price level for your trade, you can measure the distance between your entry and the stop loss to determine the potential loss and then figure out the position size. It sounds more complicated than it is; take a look at our position size calculator to test it out. Without a stop loss, it’s impossible to determine the accurate position size.

2) It defines the worst-case scenario

The stop loss order makes sure that your trade will be closed when price reaches the level (although events might occur where your stop isn’t filled). Thus, with your stop loss order and the correct position size you can pre-determine how much you are willing to lose on any particular trade. Only risk what you can lose comfortably and there will be no surprises anymore with a stop loss in place.

3) Defining the reward:risk ratio

The reward:risk ratio is the figure that calculates how much you can potentially win on a trade and compare it to the potential loss. But, the risk reward ratio does much more for a trader. As you will learn in the advanced section, the reward:risk ratio helps you understand your performance much better and even allows traders to estimate the expectancy of their methodology before they enter the trade. To sum it up, the reward:risk ratio is among the most powerful trading concepts.

4) Protect your profits

Once a trade has moved in your favor, you can move your stop loss behind current price, to secure unrealized profits. More to that later.

Tips for better stop loss placement

The majority of traders only spends little thoughts about stop loss placement. Usually, traders don’t even have a thought-out plan or concept when it comes to placing stop loss orders, but they just arbitrarily place stop loss orders at random levels.  The following 3 concepts help you improve your stop loss approach:

1) The correct process of placing stops

Most traders have good intentions, but often execute it the wrong way.  It is important that you identify the price level for your stop loss level first. Most traders just think about how big their position should be and then try to find a stop loss price. Why this is wrong, we will investigate in the next point. It’s essential that you stick to the following process:

Additional tip: After identifying your stop loss level, look for the price to place your take profit order at. After knowing where you place your orders, determine the reward:risk ratio. If the reward:risk ratio does not match your criteria, skip the trade and do not try to modify your orders to achieve a better reward:risk ratio. This is a common beginners mistake.

2) Use reasonable price levels

Most traders misunderstand what a stop loss really is. At its core, the price level of your stop loss order is the price where your trade idea is no longer valid. It is O.K and normal if price goes against you on your trade, but at some point, a price movement against your trade makes your trade idea invalid.
Therefore, it is important to use reasonable price levels for your stop loss order. Traders who use random stop loss orders tend to re-enter and revenge trade more often because they still believe that their trade idea is still valid.

3) Don’t personalize losses and stick to your stop!

Realizing a losing trade is normal in trading and it is unavoidable. Most traders know this concept and understand that you just cannot trade with a 100% winrate. BUT! But, when it comes to dealing with losses, traders are particularly bad. When price hits your stop loss, it is not  (necessarily) a sign that you are a bad trader, or that you have done something wrong, but just that your trade idea did not work out.
As a trader you have to make sure that you can come back tomorrow and not lose all your money, or an unnecessarily large amount, on a single trade. For this reason, you have to live by this concept: Don’t personalize losses. If you ever find yourself widening stop loss orders or taking them off completely because you want to give your trade the chance to turn around, think twice and really evaluate your objectives and reasonings.

5 Common mistakes about stop loss orders

By following the previously laid out plan, traders can already make their stop loss placement much more professional. But there are a handful of concepts that can help traders even further improve the way of placing and executing their stop loss orders.

1. The hindsight fallacy – think long-term

Once price hits your stop loss order and moves on, it’s very easy to find reasons if you should have stayed in that trade or whether you should have used a different stop loss approach.
When traders see that their stop was set too far away, they will use a smaller stop on their next trade which will make them more vulnerable to volatility. On the other hand, if traders notice that they should have used wider stop loss order, they will reduce the reward:risk ratio of their system by using larger stop loss orders.
As a trader it is important to think ‘long-term’. Do not make adjustments to your approach on a trade-to-trade basis. Follow your rules, evaluate your data and then try to find ways to improve your trading.

2. The break-even trader

Moving a stop loss to the point of your entry (break even) is a great amateur mistake when done with the wrong intentions. The point of your entry, especially if you trade the obvious moving averages or support & resistance levels, is very evident and the smart traders will know where amateur traders get into their positions and that they move stops to break even. This makes stop hunting very easy. As you can see, brokers do not have to read out their customers’ order information because the average trader makes it too easy and obvious how they execute their trades in the first place.

3. Not using a stop gives you flexibility and avoids stop hunting

The myth that not using a stop loss provides you with some kind of flexibility to react to sudden price moves is one of the worst things common trading knowledge suggests to traders. Not using a stop means that you risk being wiped out in one single trade, or at least lose so much money that it cancels out months of good and consistent trading.  Furthermore, it is impossible to use a sound money and position sizing strategy if you don’t use a stop loss order.

4. Adapt to natural price behavior

The majority of trades doesn’t just take off and run straight into your take profit, but moves back and forth. Whereas trailing a stop behind the current price to protect your position can be a good thing, the way traders execute this concept will ruin every profitable system.
It is therefore important to give your trade room to breathe and not move your stop loss to close to current price. Spend some time observing how price moves back and forth and you will be able to spot the wavelike price behavior. The screenshot below illustrates how in a long-term uptrend, you will get frequent retracements.

5. Volatility and changing stop loss orders

Financial markets are constantly changing, the volatility changes and also how price reacts to certain conditions varies a lot. Traders, on the other hand, use a fixed and always constant approach when it comes to placing stop loss orders. Often, traders, even use the same stop loss approach across different financial instruments or timeframes.
Being a trader means adapting to changing market conditions. By tracking volatility and how price behavior changes over time, you can improve your order placement by adjusting your stop loss approach.
In times of higher volatility, use a wider stop loss and take profit method. In times of low volatility, use smaller orders. Tools to measure volatility and changes are the ATR indicator, Bollinger Bands or the VIX.

How to Embrace Your Fear in Trading: The Trading Intelligentsia Has it Wrong

Most trader's and coaches think of emotion as if it is trading kryptonite. The worst of these emotions is thought to be fear.

If you Google "fear" and "trading" you will see a host of "how to overcome fear in trading" articles. No disrespect to those authors, but they are worthless. Don't read them. Every one of these articles misses the point.

Fear in trading is a good thing. It is an emotion that is telling you something. To a trader it is warning that "something is wrong here. Past experience and pattern recognition is a signal that I need to adapt my strategy." 

Why would you want to overcome this legitimate warning signal? Ignoring your emotion and sticking with the plan is a likely bad move. Rather than overcoming this vital emotion, embrace your fear and investigate why the sirens are going off in your head.

The 3 Step Process Embracing Fear

When fear grips me during a trade, I analyze the situation using a  3 step process:

1. I ask myself why I am scared. I review the setup, patterns, risk parameters, position sizing and market conditions. If something has fundamentally changed in any of these factors, I reassess the trade. 
2. If I can't find anything wrong with the trade, I think back to the last time few times I felt this way. Was there a common theme. Did something significant happen in those trades, or was my fear ultimately misguided?
3. If I still can't come up with anything, I look inward. This is where self actualization comes into play. I try to take a step back and "watch the watcher". Is this emotion based on flawed perceptions? Are there factors outside trading making me feel this way? Am I focusing too much on recent profits and losses rather than the trade? 

If my perceptions are flawed or the fear is based on my own mental anxiety rather than a change in trade conditions, I make no trade adjustment and come up with a plan to work on myself.

After this three stop process, a plan is in place to fix the trade or the trader. By doing so, I end up becoming a better trader. This is accomplished not by overcoming my fear, but by embracing it.

The Trader’s Survival Kit – If You Are Still Not Seeing Progress, This is For You

The question “What does it take to become a better trader?”, is one of the most asked questions we receive on a regular  basis, besides indicator and system questions which is another story… Today, we are going to talk about a few topics and concepts which are essential to trading success and which should be the #1 priority of every trader. The topics and ideas that we are going to share should be used to perform a self-check and evaluate how your mindset, approach and attitude lives up to these points.

Master the basics first – The bottom-up approach

Success  is neither magical nor mysterious. Success is the natural consequence of consistently applying the basic fundamentals.
– Jim Rohn

The problem with traders is that they often get lost in the details and skip the core basics which inevitably leads to unprofitable trading and it is hard, if not impossible, to get back on the right track after you have installed the negative behavioral patterns. Thus, focusing on the essentials and building a solid foundation first is so important that we can’t stress this often enough.
If you want to become a doctor, you have to know your tools and get a good understanding of the human body, before you make diagnoses or have your first surgery. There is no “How can I become a Doctor in 2 weeks” course and traders would be much better off if they understood that shortcuts lead to nowhere and that profitable trading takes a lot of time and effort.
Thus, as a trader you have to identify your most common mistakes and problem areas first and only move on, after you have overcome these problems. If you still don’t have the discipline to wait until all entry rules are present, or you still keep widening your stop loss orders and let losing trades often get out of hand, there is no point in looking for another, “better” method or trying out a different profit taking approach which may give you a few extra points. Unless you haven’t overcome the most basic and essential problems in your trading, there is no reason why you should focus on more advanced trading topics.
Bottom-up means that you identify and tackle your greatest problems first and you address your issues one by one. This way you will not only see the greatest impacts on your trading, but it lays a solid foundation upon which you can build your trading career later.

Realistic expectations and the correct mindset

The vast majority of people start trading because of all the money that could be made. And although being motivated and having great dreams and ambitions is not necessarily bad, it can often lead to the wrong actions. Especially new traders are chasing double digit returns, while burning through a lot of cash at the same time; this is a huge paradox in trading. People can’t and don’t want to accept that making only a few percentage points on a consistent basis is much more desirable than constantly risking a substantial part of their account, trying to land a lucky punch.
We urge you to check your expectations NOW. But don’t just say that you are not after the big money and that you are trading because you like the game, evaluate your actions because they accurately reflect your true mindset. Do you still jump from system to system regularly without seeing any progress, do you still make the typical beginner’s mistakes of widening stop loss orders, taking trades that don’t match your criteria and use too much risk to make up for past losses faster? How serious are you about trading? Do you spend enough time working on your skills? Do you plan your trades ahead and keep a trading journal regularly? These are all questions you have to answer in order to get a clear picture of your expectations and mindset.

Being honest with yourself

This point picks up where we left off. Being honest with yourself is an important character trait of any professional in any field. Without having the ability to honestly look at yourself, progress is impossible and although it can sometimes be a painful revelation, if you are not aware of your flaws, you will keep making the same mistakes without any chance of improvement.

I think self-awareness is probably the most important thing towards being a champion.
– Billie Jean King

In trading, self-delusion is very common and it is often a protection mechanism which shields you from the painful reality of your actual performance and it helps justifying the completely irrational pursuit of trying to find the one trading system that will finally provide the best entry signals and turn you into a successful trader. It is not uncommon that even after spending years and years trading, people still look like complete beginners and they are as far away from becoming a profitable trader as they can possibly be.
To perform a self-check, ask yourself these questions. But, most important, answer them completely honestly because, in the end, no one else cares whether you will become a profitable trader, or just keep lying to yourself about your trading journey:

• Am I still losing money consistently?
• Am I still making the same mistakes time and time again?
• Do I regularly try new trading methods without really putting in the work to master one?
• Is my trading routine reflecting my goals? Do I set aside time to work on my skills, to keep a trading journal and to plan my trades in advance? Am I spending time off the charts at all?

These 4 questions will provide a very clear picture about your mindset. The answer will show whether you are really serious about trading or if you are just looking for a get rich quick method. However, if you catch yourself by thinking “This is not true for me. I don’t have to answer these questions. I will find a good trading strategy somehow.”, you need to rethink your trading approach more than anyone else.

7 tips to kick-start your trading and make a fresh start

#1 – Pick one method and stick with it
This is more like a challenge than a tip. Next time when you want to change to another trading method or make a significant change, ask yourself how far hopping from system to system has brought you. For the next few months, stop trying new things and instead, focus on how to improve the one strategy you have.

#2 – Follow the bottom-up approach
Identify your greatest challenges and problems and work on them first. Don’t spread your focus, but try to make one step at a time. What is causing you the greatest losses? Identify your #1 problem and work on it!

#3 – Establish a trading routine
Instead of doing multiple things at once and being all over the place, pause and reflect. Establish a routine which includes the time for planning your trades, your actual trading time and how you approach trading in general (which instruments, time-frames, how do you monitor your charts, etc.) and how you work on your skills after your trading sessions.

#4 – Stop chasing returns
Don’t try to double your account very few months. This is just not how trading works. Set yourself realistic expectations. The order of priorities should be:
Stop making beginner’s mistakes à Stop losing so much money à Become a break-even trader à Small and consistent profits following a disciplined approach

#5 – Work on your skills offline
Most traders, after closing a trade, will never look at their past trades again. This completely avoids a learning effect and makes improvement impossible. Start a trading journal and regularly review your trades and your past performance.

#6 – Evaluate your mindset and goals
Constantly check in on yourself and evaluate whether your actions reflect your goals. Do you keep making the same mistakes? Did you stop writing a trading plan and a trading journal? Are you back to system-hopping?

#7 – Focus on making the best decisions
Adopt a process-oriented mindset. This means that you trade detached from your P&L and focus solely on making the best trades and decisions. This will often take care of many other problems as well. In this video we explain the importance of having a process-oriented mindset.

Scientist Discovered Why Most Traders Lose Money – 24 Surprising Statistics

“95% of all traders fail” is the most commonly used trading related statistic around the internet. But no research paper exists that proves this number right. Research even suggests that the actual figure is much, much higher. In the following article we’ll show you 24 very surprising statistics economic scientists discovered by analyzing actual broker data and the performance of traders. Some explain very well why most traders lose money.

1. 80% of all day traders quit within the first two years. ¹
2. Among all day traders, nearly 40% day trade for only one month. Within three years, only 13% continue to day trade. After five years, only 7% remain. ¹
3. Traders sell winners at a 50% higher rate than losers. 60% of sales are winners, while 40% of sales are losers.²
   
4. The average individual investor under performs a market index by 1.5% per year. Active traders under perform by 6.5% annually. ³
5. Day traders with strong past performance go on to earn strong returns in the future. Though only about 1% of all day traders are able to predictably profit net of fees. ¹
6. Traders with up to a 10 years negative track record continue to trade. This suggest that day traders even continue to trade when they receive a negative signal regarding their ability. ¹
7. Profitable day traders make up a small proportion of all traders – 1.6% in the average year.However, these day traders are very active – accounting for 12% of all day trading activity. ¹
8. Among all traders, profitable traders increase their trading more than unprofitable day traders. ¹
9. Poor individuals tend to spend a greater proportion of their income on lottery purchases and their demand for lottery increases with a decline in their income. ⁴
10. Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios. ⁴
11. Men trade more than women. And unmarried men trade more than married men. ⁵
12. Poor, young men, who live in urban areas and belong to specific minority groups invest more in stocks with lottery-type features. ⁵
13. Within each income group, gamblers under perform non-gamblers. ⁴
14. Investors tend to sell winning investments while holding on to their losing investments. ⁶
15. Trading in Taiwan dropped by about 25% when a lottery was introduced in April 2002. ⁷
16. During periods with unusually large lottery jackpot, individual investor trading declines. ⁸
17. Investors are more likely to repurchase a stock that they previously sold for a profit than one previously sold for a loss. ⁹
18. An increase in search frequency [in a specific instrument] predicts higher returns in the following two weeks. ¹⁰
19. Individual investors trade more actively when their most recent trades were successful.¹¹
20. Traders don’t learn about trading. “Trading to learn” is no more rational or profitable than playing roulette to learn for the individual investor.¹
21. The average day trader loses money by a considerable margin after adjusting for transaction costs.
22. [In Taiwan] the losses of individual investors are about 2% of GDP.
23. Investors overweight stocks in the industry in which they are employed.
24. Traders with a high-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

Conclusion: Why Most Traders Lose Money Is Not Surprising Anymore

After going over these 24 statistics it’s very obvious to tell why traders fail. More often than not trading decisions are not based on sound research or tested trading methods, but on emotions, the need for entertainment and the hope to make a million dollars in your underwear. What traders always forget is that trading is a profession and requires skills that need to be developed over years. Therefore, be mindful about your trading decisions and the view you have on trading. Don’t expect to be a millionaire by the end of the year, but keep in mind the possibilities trading online has.

Why You Lose So Much Money Trading

The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.” -Ed Seykota
The above image shows the destruction of capital, not only for a losing streak, but also for a string of 10 trades with a 50% win rate; alternating between wins and losses.
Many things cause new traders to fail. One of the main reasons that traders fail is because they don’t understand the math of capital destruction. The more capital you risk per trade, the quicker you will lose it in losing trades. Once your capital is depleted, it takes a larger return to get back to even than what you initially lost.

• A 10% loss requires an 11% return to get back to even
• A loss of 20% of your capital requires a 25% return to get back to even
• A 50% loss of capital needs a 100% return just to get back to where you started
• Risking 1% of your capital per trade puts you down 10% after 10 trades
• Risking 5% per trade puts you down 50% after 10 trades

No matter how good you are, you can’t trade so large that a single losing streak is your last. If you risk too much of your trading capital, even a few losses in a 50% winning streak will destroy your capital. You’re not going to be perfect as a trader, and you have to play the defense needed to protect your trading account from losing streaks. You will have streaks of 50% win rates and losing streaks. The question is, will you survive them with your current risk exposure.
You have lost money trading because you exposed your capital to too much risk in a single trade. You haven’t been profitable because your losses have destroyed your capital. You have to structure your position sizing so your losses don’t destroy your capital after every losing streak.
“This idea that in order to make a decision you need to focus on the consequences (which you can know) rather than the probability (which you can’t know) is the central idea of uncertainty.”
― Nassim Nicholas Taleb

Trading Methods, Systems, and Plans

Do You Know the Difference Between Trading Methods, Systems, and Plans?

There are significant differences between trading methods, trading systems, and trading plans. These variations can be confusing for new traders, but it is important that students of the market understand and develop these areas in order to optimize their chance of success.

Trading Method

A trading method is the overall process and trading style that is used to profit from the markets. A trading method can be defined as principles used to successfully trade in the stock market, options, forex, futures, or bonds. These operating principles are based on the belief of long term profitability and increased value of trading capital. Traders using different systems and different plans can use the same methodology. Methodology is based on the specific style of trading, with some examples being:

• Technical Analysis
• Trend Following
• Value Investing
• Momentum Trading
• Growth Investing
• Swing Trading

Trading System

A trading system is a set of rules that quantifies buy and sell signals, as demonstrated by successful testing on price history or chart studies. A trading system is the specific kind of data or knowledge used to execute the trading method, based on price action or fundamental valuations. These signals are triggered by measurable technical indicators or key levels on charts. Trading systems have specific parameters relating to position sizing that manage risk and increase the probability of profitability over time. A trading system has at least eight quantifiable elements:

1. Entry signal
2. Exit signal
3. Winning percentage
4. Risk to reward ratio
5. Position sizing parameters
6. Frequency of trading opportunities
7. Average expected annual return
8. Maximum expected drawdown

Trading Plan

A trading plan is a set of rules, consistent with a trader’s chosen methodology and system that govern how trades will be executed in real-time. These rules determine what will happen based on the trading system’s entries and exits, risk management, and psychology. The trading plan is meant to keep the trader disciplined and safe from their own weaknesses, while providing the parameters for consistent profitability.

Understanding the difference between methodology, system, and plan is essential to organizing and implementing trades at the right levels. As traders turn research into beliefs, trading methods will become their religion, trading systems will become their bible, and their trading plan will allow them to walk in faith every day.

9 sports analogies that will finally help you understand trading

Analogies are a great way to illustrate complex concepts. They help explain ideas which are often not intuitive at first glance. The following 9 sports analogies highlight some of the most important trading concepts. Violating only one of these principles often leads to inconsistent trading results. By understanding a few simple ideas and applying them to your own trading you can greatly increase the effectiveness of your trading routine.

Tennis – who is making mistakes

“In professional tennis, about 80% of the points are won; in amateur tennis, about 80% of the points are lost.”

The statistic above says that the amateur players lose their matches not because their opponent is too strong, but because they make too many mistakes themselves. The same is true for trading. It is not the market who is to blame for your trading. Your own decisions and actions cause trading losses. When you violate your risk principles, take trades that are too big, add to losing positions, break your entry rules, engage in revenge-trading, try to make up for past losses and impatiently take bad trades that don’t match your criteria, those are the things that are responsible for trading failure and it’s only you who is to blame.

Baseball – be content hitting singles and doubles

Instead of going for the home run and risking striking out, be ok with hitting singles and doubles. You won’t see the professionals wildly swinging their bats risking it all just to maybe, somehow hit a home run. Instead, they focus on following their regular routine and do what they have done thousands of times before. They know that by continuously making point after point, they stand a much greater chance of winning.

The best traders also know that they have to follow their routine and always stick to their rules to steadily grow their trading account. Arbitrarily opening trades that are against your rules, hoping to somehow land the big winning trade that will offset all your losses is not a valid strategy.

Football – the ultimate mix of offense and defense

The team who will eventually come out ahead is the one who has both, a good offense and a good defense. It’s of no value if your offense is exceptionally good when your defense can’t keep opponents from scoring. On the other hand, the best defense means nothing when your offense can’t score.

You have heard it before: trading is all about great defense. But it’s not entirely true. Only if you are good at offense AND defense, you have a chance. Knowing when not to trade or risk less is essential for a good trader and it keeps him from losing money in rough times. On the other hand, a trader also has to know when to be more aggressive with his position sizing and when to let his winners run.

Boxing – being prepared for the next trade

Boxing is a great example when it comes to being prepared and having a game plan. A boxer only has to face one opponent at a time. Boxers study their opponents in-depth before they get into the ring. And when it’s time to fight, they will have a specific and unique game plan at hand which is tailored around their opponents’ strengths, weaknesses and unique features. This plan changes from fight to fight because every match and every opponent is different and required a different tactic.

Traders need a trading plan where they analyze current market conditions, price action and other parameters. Then, they have to come up with specific trade ideas and potential trade setups. Traders have to be prepared for every possible outcome and know exactly what they are going to do under which circumstances. If something catches you off-guard and you haven’t done your homework, you shouldn’t compete and step back to analyze the situation.

Ice Hockey – plan ahead

It’s very obvious that you shouldn’t move to where the puck has been, but instead move to where it’s going to be. You don’t have to be an ice hockey pro to understand this simple principle, but the implications for trading are important.

Traders focus too much on the left side of their charts. They put too much emphasize on the past. During uptrends, traders keep on calling tops and open short trades into higher moving prices, instead of seeing what is really going on and joining the obvious trend. Think ahead and put everything into context, or otherwise you will be taken out of the game.

Chess – don’t lose your head

Amateur chess players lose their focus too fast and engage in revenge-hitting after their opponent has eliminated an important figure of theirs. By making impulsive moves without thinking about the consequences they expose their other figures to great danger and open the path for their opponent to do even more harm.

The good trader, like a good chess player, has to think one move ahead and not lose his focus. After a losing trade, don’t just open a new trade because you want to prove that you were right. It is better to step back, reassess the situation and then come up with an improved game-plan.

Season sports – one match doesn’t matter

A season in games like soccer, football, basketball, baseball and hockey easily consists of 30 or more games. Although it is frustrating to lose, it is often not as important to win every single game to reach the overall goal to be number 1 at the end of the season. After a loss, the best teams analyze what went wrong, where they made mistakes and how to correct their behavior for their next match.

In trading, an effective review process will make sure that you don’t repeat the same mistakes twice. After a loss, analyze what caused the loss, check if you made any mistakes and what you could have done better. Then, write down your lessons to remember them for the next time. Traders without a review process in place, or who do not keep a trading journal avoid a learning effect and are doomed to repeat the same mistakes over and over again.

Team sports – understand Your position

If you are a forward, you know that it’s your job to catch rebounds. A point guard is the team’s best passer and handler and a shooting guard’s job is to get the ball in the hoop. Their position and task is tailored around their own unique talents and skills to ensure that they can make the most of their skills.

Traders, also, have to find their personal strengths and identify what they are best at. It all starts with choosing the right market. Are you a stock, futures, forex or options trader? Are you better with price action, do you need indicators or a mix of both? Are you better at trading higher or lower time frames? Do you prefer high or low volatility trading environment?

Answering these questions is not easy and it is a process. Thus, blindly following other peoples’ trading strategies is often not the best thing to do. You have to find your own way as a trader.

Your winrate is not important

Traders spend the majority of their time looking for trading methods that promise a higher winrate whereas they are often much closer to success than they know. In sports, like in trading, it is not the person with the highest winrate who is going to be #1 in their field, but the person who consistently brings his best game every single time.

Especially in trading, having a high winrate is not important at all. It all comes down to the right balance between winners and losers. Trying to find that one special trading method with a perfect winrate will keep you from making real progress as a trader.