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.

How to Trade During a Zombie Apocalypse

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.

1. 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.
2. Selling strength short is the path of least resistance in this market.
3. Continue to trade signals and not opinions. Have a reason for every trade. No signal, no trade.
4. Trade small. The velocity of price action can causes big wins and big losses. Protect yourself from the big losses with small position sizes.
5. Investing in stocks early in corrections and bear markets is not a profitable strategy. The hurricane of a bear market wrecks all ships.
6. If the market environment does not fit your trading methodology, don’t trade until it does.
7. Take each trade one at a time.
8. Trade your system and not your emotion.
9. No, it doesn’t have to bounce back.
10. Yes, it can go lower.
11. Maintain a clear mind and don’t let your ego, fear, and shock cloud your trading judgement. Follow your trading plan.
12. Focus on surviving and not on profitability.

The Stock Market Special Sauce

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

Calm Trader, Rich Trader

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.

1. Impulsiveness. The biggest thing that following a trading plan does is trade impulsiveness for proven rules.
2. Impatience. Quantified entries and exits make you wait for a signal and avoid the noise.
3. Anger. You have to depersonalize the outcome of your trades. Each trade is just an entry and an exit, with no emotions required.
4. Uncertainty. We must accept the randomness of our short term results and understand our long term edge.
5. Laziness. You have to do enough homework when the market is closed to be ready when the market is open.
6. Greed. Following the correct position sizing parameters replaces the need for big wins and helps you focus on risk management.
7. Fear. The confidence in your system will relieve the fear of failure.
8. Ego. The desire to make money has to override the need to be right about specific trades.
9. Hope. A stop loss has to replace the need to hope a losing trade comes back to even.
10. 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.

Forget Candlestick Patterns – This is All You Need to Know

         

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:

1. The length of wicks/candles

The length of wicks and candles can give you direct information about volatility. Longer candles imply greater volatility.

2. 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.

3. 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.

4. 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.

5. 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.

7 Things That Lure Traders to Their Doom

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:

1. 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.
2. 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.
3. 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.
4. Adding to a losing trade. This can turn a small loss into a big loss that the ego becomes invested in holding.
5. 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.
6. 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.
7. 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.

Stock Market Success: It is All in Your Mind

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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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?