The past five trading days have been some of the worst price action I have ever seen. Today will go down as one of those trading days you never forget. If you didn’t lose money, you had a great day. If you made money—well done! The dip buying signals of the past six years have failed, the bell has rung, the bulls have lost, and something bad is brewing.
Here are my 12 tips for trading through this mess, when central banks lose control, and supply and demand kick in.
The market is now in a downtrend. Traders will not be bailed out of bad, long side trades. Many investors and traders are now trapped in big losses and will be selling every chance they get.
Selling strength short is the path of least resistance in this market.
Continue to trade signals and not opinions. Have a reason for every trade. No signal, no trade.
Trade small. The velocity of price action can causes big wins and big losses. Protect yourself from the big losses with small position sizes.
Investing in stocks early in corrections and bear markets is not a profitable strategy. The hurricane of a bear market wrecks all ships.
If the market environment does not fit your trading methodology, don’t trade until it does.
Take each trade one at a time.
Trade your system and not your emotion.
No, it doesn’t have to bounce back.
Yes, it can go lower.
Maintain a clear mind and don’t let your ego, fear, and shock cloud your trading judgement. Follow your trading plan.
If you have ever had a Big Mac (and is there anyone who hasn’t had a Big Mac?), you know that what sets it apart from other fast food hamburgers is something called Special Sauce. Surrounded by controversy, people have been trying to figure out exactly what was in this magical sauce for decades.
As it turns out, it is pretty much just thousand island dressing. Kind of a let down, I know. But Micky D’s did an amazing job of promoting their burger and making it seem truly special.
The stock market is the same way. There is no special sauce. There is no magical formula that is going to make you rich overnight or solve all your trading problems. If you want to be a successful trader, you need to focus on these simple truths.
There are no magical entries or exits. Trading is a pre-defined process of trading with a winning system that gives you an edge.
You have to trade with a plan. Flying by the seat of your pants is a recipe for disaster. Plan, plan, and plan some more.
Take your losses when it’s time, and maximize your wins to the best of your ability.
Do the homework and implement what you have learned, consistently with conviction and focus.
There is no easy money. Accept the fact that you will have to earn it, and work hard to do it.
Many people play the stock market like they are trying to win the lottery. They just go with their gut, risk it all, and hope for the best. Take control of your future as a trader and realize that there is no quick fix. You have to do the work if you want to win, but if you work hard to research and develop a winning system and trade it with a plan, there is unlimited potential.
“Difference between great traders and the rest isn’t magic entry points, instead they’re better risk managers and better at position management.” – Richard Weissman
Traders that are emotionally calm and cool that approach trading as a business, have greater odds of profitability than the thrill seekers and gamblers that come to the market. One third of trading is based on logic, and two thirds is based on emotions.
Here are 10 things that a trader has to overcome to stay calm and be profitable.
Impulsiveness. The biggest thing that following a trading plan does is trade impulsiveness for proven rules.
Impatience. Quantified entries and exits make you wait for a signal and avoid the noise.
Anger. You have to depersonalize the outcome of your trades. Each trade is just an entry and an exit, with no emotions required.
Uncertainty. We must accept the randomness of our short term results and understand our long term edge.
Laziness. You have to do enough homework when the market is closed to be ready when the market is open.
Greed. Following the correct position sizing parameters replaces the need for big wins and helps you focus on risk management.
Fear. The confidence in your system will relieve the fear of failure.
Ego. The desire to make money has to override the need to be right about specific trades.
Hope. A stop loss has to replace the need to hope a losing trade comes back to even.
Stress. You have to manage your risk exposure to losses in order to reduce your stress level.
The profitable traders are rarely, if ever, emotionally stressed. The egomaniacs and the gamblers are usually the ones that lose it all. The calm traders are the ones that typically keep a level head and maximize opportunities when the market presents them.
Understanding candlestick patterns goes far beyond remembering and recognizing certain formations. Many books have been written about candlestick patterns, featuring hundreds of different formations that supposedly provide secret information about what is going to happen next. Whereas it will make no difference to your trading performance whether you know what the Concealing Baby Swallow, Three Black Crows or Unique Three River Bottom are, once you understand what candlesticks really are, you can look further and read the story that price actually tells you.
Candles Tell You a Story
Candlesticks are just a different way of visualizing what is happening on your charts. But once you can read why and how candlesticks manifest on your charts, you can act and trade detached from pre-defined and arbitrary patterns, reading sentiment and momentum straight from your charts. In the following we take a look at the things that candlesticks tell you and how to read them.
How to Read Candlesticks: The 5 x 5 of Candles
One of the most important things candles tell you is whether Bulls or Bears are winning the game and, what might even be more important, by how much. But understanding the story of price goes further than checking whether a candle is black or white; to fully understand market sentiment you have to analyze the following five elements of candlesticks:
The length of wicks/candles
The length of wicks and candles can give you direct information about volatility. Longer candles imply greater volatility.
The ratio between bullish and bearish wicks
When price moves down and gets pushed back up, it leaves a long wick to the downside. That can signal that bearish strength is not enough to keep prices down.
The position of the body
In addition to the previous point, it is important to analyze the position of the body. Does the candle have a long wick to downside and is the body at the very top of the candle, it can signal greater strength than a body in the middle of the candle. In contrast, does the candle have long wicks to both sides and is the body positioned in the middle of the candle, it indicates indecision and equal power between Bulls and Bears.
The size of the body
A rule of thumb is that the larger the body, the stronger the signal it provides. A large body indicates that price moved a great distance between the open and the close of the candle.
The ratio between body and wicks
Is the body of the candle large, whereas the wicks are small, it shows that price moved from the open to the close without much volatility to either side. Small wicks and a large body are a sign of strength. In contrast, long wicks and a small body indicate indecision and equal power between Bulls and Bears.
If we combine the previous five points, we find that there are five possible scenarios what candles could tell us: (1) Strong bullish power, (2) Strong bearish power, (3) Bears tried to force price down, but Bulls managed to conquer, (4) Bulls tried to force price up, but Bears managed to conquer (5) Bears and Bulls have equal power.
All candlesticks formations are made up of these five scenarios, combining the five previously described elements of candlestick information. By understanding the 5 x 5 of candle elements, you are well equipped and do not need to remember any candlestick pattern since they are all a combination of them.
Demystifying Candle Patterns
We showed you that it is not necessary to remember any candlestick formation if you understand the 5 x 5 candle elements previously discussed. To illustrate further how candlestick patterns are constructed, see the following graphic. As you see, an engulfing candlestick formation is therefore nothing but a pinbar/hammer when you add up the two engulfing candles.
More important, this is just one example of how candles are created and when you understand how to read price and candles, you will notice that there is no need to remember any more candlestick formation whatsoever.
Conclusion: No Need For Candlestick Patterns
With this article we want to show you that you do not have to learn any candlestick formation. When you understand the 5 x 5 of candlesticks, you know everything you need to know about candles. The 5 x 5 enables you to read every possible scenario that you can find on your charts.
New traders come to trading excited about learning, and looking for a fast path to riches. The majority of new traders can make big mistakes that take their accounts to zero during their learning curve. Traders can grow their capital if they do it correctly, but there are dangers that new traders should be aware of. I hope this blog post saves you a lot of money if you are a new trader, or refreshes your memory if you find yourself tempted to play big and loose with your trading capital. Here are some of the dangers:
Trading too large a position size due to overconfidence of an entry signal. You must limit your trade size to safe levels, and not let faith become your position size metric.
Taking positions in markets that are not liquid enough to handle your trade size. You can lose a lot of money fast by getting in and out of a trade with a wide bid/ask spread. The options market in low volume stocks and penny stocks are the worst for this.
Holding on to a losing trade and not taking your initial stop loss. Getting caught on the wrong side of a trend can turn a small loss into a big loss. Big losses are the number one cause of unprofitable trading.
Adding to a losing trade. This can turn a small loss into a big loss that the ego becomes invested in holding.
Thinking that you will get rich quick. The stronger the urge to get rich quick, the greater the odds that a new trader will take the risks that will lead them to ruin. Slow and steady wins the trading race.
Being under capitalized. Trading an account that has not accumulated enough capital can cause a new trader to take too big of a position size, and take too many risks. Profitability will be nearly impossible, as commissions will be too high of a percentage of each trade. Serious active trading requires at least a five figure trading account. The markets will be here when you are ready.
Trading markets you do not understand. Trading Forex, futures, or options without a full understanding of how they work, and the risks involved, is a formula for disaster. You must gain competence in these markets before you will be successful.
Avoid these dangers and stick with what you know. Trading is a marathon and not a sprint. Make sure you are running in the right direction before you start the race.
No matter the kind of trader, or their level of success, everyone gets up in the morning and puts their pants on one leg at a time. They read the same news, have access to the same strategies, and trade the same stocks. So what makes one trader more successful than another? What gives anyone an advantage in today’s world?
I would argue that the biggest difference between traders is their mindset. Nothing will separate you from the pack faster than having your head in the right place, and it will always give you an advantage over the majority of people who are mentally hanging on for dear life.
To have a winning mindset, you need to focus on four key elements:
Positive Outlook
Foundational Relationships
Stress Management
Emotional Control
All of these are critical to success, but I will focus on positive outlook in today’s post.
What is a positive outlook? It’s more than just ‘Look on the bright side!’ It’s a frame of mind that puts you incontrol. This is critical, because when you feel overwhelmed or unable to be effective, it is impossible to be positive about much of anything. Here are a few ways that you can take control of your own positive outlook.
Start each day by thinking about your strengths. What are you good at? Are you a wizard when it comes to chart analysis? Do you have a keen eye for tech start-ups? Overcome frustration by spending time thinking about what sets you apart from everyone else.
Don’t just set goals, reward yourself for achieving them. Steve is big on following a trading plan, and so am I. But don’t take it for granted that your mind will automatically follow the rules. For some people, following a plan is easy, but for others, it is a daily struggle. If you find yourself getting annoyed when you have a strategic misstep, make a mental note to reward yourself when you do successfully follow your plan.
Be aware of your feelings. When you are miserable doing something during the day, make note of it. When you are happy, make a note of that, too. By observing patterns in your own behavior, you will be able to gravitate more towards the things you enjoy. Maybe your trading time frame needs an adjustment, or you need to find a better support system.
At the end of the day, take time to reflect on the day’s events. Slowly, and without judgement, play through what happened during the day. Find something negative that you think you could turn into something positive and make a mental note of that.
And finally, practice relaxing. I say practice, because for most of us, this does require some work. It’s difficult to unplug, breathe, and clear your mind. I once had a meditation client who, when told that I recommended a ten minute meditation session every night, he exclaimed, “Ten minutes!! Who has that kind of time?!” It doesn’t have to be meditation; it can be reading a book, petting a cat, or anything else that lowers your heart rate and brings you joy.
By cultivating a positive outlook, you will inevitably draw positive things into your life, and increase your odds of success. You will attract the best people and be presented with great opportunities. Positivity attracts positivity, and negativity attracts negativity. Which will you choose?
Often, as traders we have periods where everything seems to go well and we have one winning trade after another. And then, there are these times when nothing seems to work and you give back all your profits, and then some. Or how often has one bad trade wiped out all your previous gains? Often, these periods of ‘bad luck’ could have been avoided by asking the right questions about your own trading and risk management.
In the following article we give you 4 questions that you should always ask yourself when your trading seems to deviate from the norm.
Are you impeccable?
Question 1: What’s the motive behind increasing your position? Are you really a better trader? Is failing really impossible?
We are starting with one of the biggest amateur mistakes traders make. In winning streaks, traders tend to increase their position size because they believe that their trading strategy is all of sudden unfillable or they believe that their ‘gut’ feeling is telling them what the right thing is to do.
“In a storm, even turkeys can fly.”
Winning streaks are normal and they will happen to all traders. The worst thing you can do in a winning streak is to increase your position size because sooner or later, you will have a losing trade. Traders who increase their position size will give back an unnecessary large amount of their trading profits when their streak ends.
Should you be aggressive?
Question 2: Are you playing catch-up? Do you want to get your money back?
The second reason why traders increase their position size is because they just had a few losing trades and they want to get their account back to where it was. Again, trading behavior, especially when it comes to risk and money management, which deviates from the norm is very dangerous.
There are two principles that all traders have to accept and live by to overcome this bias:
1) You cannot force winning trades.
2) The distribution between winning and losing trades is random. The outcome of your last trade will provide no information about what is likely to happen next.
Therefore, your risk management should always follow the same principles, even if it means that recovering from a few losses takes a bit longer. In previous articles we said that you do not have to risk the same amount on any trade, but suddenly risking an unusual high amount does not fall into this category.
Frequency of trades
Question 3: Are your trades justified? Do you really see more signals and valid setups?
Increasing trade frequency is another common mistake that leads to avoidable losses. Traders should carefully observe their trading behavior and ask themselves whether they are really seeing more valid trading opportunities or if they are entering a status of overtrading.
Having a trading plan and a trade checklist can prevent overtrading because you will consciously and actively have to break your trading rules. Even better, print out your trading plan and checklist and put them next to your screen where you can see them at all times.print out your trading plan and checklist and put them next to your screen where you can see them at all times.
Leave your ego at the door
Question 4: Is adding to your position really what you should be doing? Why are you widening your stop loss? What if price does not turn around?
Traders have to be confident in their abilities and about their strategy, but you cannot let your ego get in the way of a trade. Pride and taking losses personally are two traits that do not go well with trading.
Adding to a losing position or widening stop loss orders are two of the most common reasons why traders blow up their accounts with just a few trades. At the same time, they are clear indicators that you can’t accept to be proven wrong and that you personalize losses. If you fail to overcome these negative trading patterns, becoming a profitable trader is impossible.
The 4 Ps to establish a professional trading approach
Preparation
We can’t stress the importance of having a solid trading plan and a trade checklist enough. If you plan your trades in advance, you are less likely to make impulsive trading decisions or violate your rules.
Purpose
As a trader, nothing should come as a surprise. You plan your trades in advance, you define your risk and the worst-case scenario, you know when to get out, when to take profits and you process all available information. If you find yourself in a situation where you have to deal with the unexpected, something went wrong.
Progress
To overcome negative trading patterns, tracking and analyzing your performance is the only way you can improve as a trader. Most traders make the mistake that they will never look at a trade again after they close their position and, therefore, leave out an important learning effect.
Protection
Protection does not only include having a stop loss in place, but it goes much further. Once in a trade, traders often act like a deer staring into headlights, unable to make rational decisions. Where and when do you lock in profits? Do you move your stop loss order to protect your position? When will you take profits ahead of your target? What are the criteria that will make you close your trade early?
Conclusion
A structured approach and a pre-defined game plan will keep you out of trouble. Trading should be a repetitive profession; each day you follow the same routine, you look for the same setups and just repeat your process over and over again. If you recognize that your behavior and actions deviate from the usual routine, something is going wrong and you have to counteract.
We are starting with one of the biggest amateur mistakes traders make. In winning streaks, traders tend to increase their position size because they believe that their trading strategy is all of sudden unfillable or they believe that their ‘gut’ feeling is telling them what the right thing is to do.
The second reason why traders increase their position size is because they just had a few losing trades and they want to get their account back to where it was. Again, trading behavior, especially when it comes to risk and money management, which deviates from the norm is very dangerous.