MOM’S TRADING RULE # 5 – NO, HOPING, WISHING OR PRAYING

In Rule # 5 – we’ll look beyond scary stories of traders blowing out their accounts because they’ve used the HWP method. That’s the ‘unprepared method’ of Hoping, Wishing or Praying. Instead we’ll look at more ways we can prepare ourselves to be ready to trade.  Being successful in any field requires being prepared on multiple levels.

“I’ve seen too many traders staring panic-stricken at the computer screen and begging the market to move their way. Why? Because they have lost their discipline and allowed what was a small loss to turn into a much bigger one. They keep hanging on, hoping, wishing and praying for things to turn around. The reality is on the screen. When the market hits your stop-loss level (the pre-determined price at which you will cap your risk), get out.”   Lewis Borsellino

Challenge # 5 – Being prepared for the unexpected.

I turned on the TV Sunday morning to find the final stage of the Tour de France about to finish as the colorful cyclists wrapped around the Champs-Elysees and Arc de Triomphe. In top physical and mental shape the competitors become one with a well-tuned piece of machinery to have a chance to compete over 21 grueling days of racing that will test both their strategic competency and their physical endurance. While each of these cyclists may be hoping, wishing, even praying for a successful outcome, I know that’s just the frosting on a very multi-layered cake. It all comes down to the last few seconds… or does it? NO? The winner is not the first man across the finish line today. The winner is Vincenzo Nibali, an Italian on Team Astana who has led for 18 out of 21 days over the routes’ varied terrain through France, England and Spain. Nibali is the winner because he consistently came out ahead through different conditions over the course of the race. As traders we seek the same goal, consistency in trading through different market terrains over the long haul. What can we learn from these guys that maintain consistency despite an inconsistent playing field?

• First, they train in different environmental conditions covering varied terrain and unexpected weather.
• Second, they are physically prepared with nutrition, hydration and rest.

Lack of preparation in either of those two areas would lead to certain failure. Lewis tells us trading reality is on the screen. Every day the market presents a new terrain.  How do I prepare for the unexpected?

Solution # 5 – Know what you’re watching for so when it happens, you’re actually ready.

Like professional cyclists, we won’t know for certain until we turn the corner whether or not the terrain will be smooth or bumpy. We won’t know ahead of time if it’s going to be choppy or trending or if the volume today will be just liquidation or new money selling. We can however be prepared to act.

Preparing your trading ideas in advance is a crucial habit for long term success. The experts in performance are able to make decisions in the moment because they are prepared via training and experience. Nibali knew what to do during a slow rain in the last stage on slippery cobblestone. Other riders were caught off balance on the slick cobblestone and paid the price.

Lewis is telling you, know what to do in the heat of the moment. That’s not the time to ‘think about it’. How did you prepare? You studied the charts, marked some reference points and maybe developed a bias? When the market comes to your area of interest, do you know what to do? Have you considered what you would expect to see?

• What the market has done and more importantly, how well has it done it?
• Under what conditions will I look for long or short entry opportunities?
• What will the reality on the chart look like? What shouldn’t it look like?
• Where is my trade idea invalidated? (This is the place where I will exit the position NO exceptions; this is how I will survive to trade another day.)
• Where will I exit with a profit?

Knowing these factors in advance helps so you don’t have to think them through in the moment.  You simply take action. You know when your indicators… volume, value, whatever you use, are in alignment; the weather is clear… take – off!

Resources – A great book, The Power of Habit will inspire you to create helpful and healthy routines. Recent research reveals we can change old habits and instill new habits. People succeed when they identify patterns that shape their lives and learn how to change them.

A lot of traders have found Evernote a very useful and free tool for daily notes.

The Trading Journal spreadsheet mentioned in Rule # 2 resources has a section called Personal. This is a convenient place to keep track of rules and experiences for later reference.  You can make your own if you have excel skills. (Mine made the purchase the low cost alternative.)

If you already have Microsoft word, you probably have One Note. It’s easy to use.

MOM’S TRADING RULE # 4 – LOSE YOUR EGO

The last three rules have focused on avoiding risky emotional triggers by maintaining discipline. These rules show how important it is to stay true to your plan while executing trades based on analysis, not opinion. In Rule # 4, Lose your Ego, we’ll extend the concept from Rule # 3, Know Yourself.

“No matter how much success you enjoy as a trader, you’ll never outsmart the market. If you think you can, you’re in for a very humbling experience. The market rules, always, and for everyone. You need to silence your ego in order to listen to the market; to follow what your technical analysis is indicating and not what your intellect (and your ego) thinks should happen. To trade effectively, you need to put yourself aside. At the same time, you cannot be so emotionally fragile that unprofitable trades shatter your confidence. Don’t be crushed by the market, but don’t ever think you’ve mastered it either.”   Lewis Borsellino

Challenge # 4 – How do I maintain confidence without letting my ego ruin my game?

Contemplating egos, I ran across LeBron James’ July 11^th essay in Sports Illustrated entitled “I’m Coming Home.” In pro basketball news lately, player and team decisions are being hotly debated. Intense online discussion and rampant speculation are reaching epic proportions. With super star players at the center of attention, how do they maintain confidence without allowing ego to ruin their game? Are there any clues for traders?

When 4 time MVP LeBron James decided to move his family and career from a major center for arts, entertainment and international trade, Miami, back to his home town in America’s heartland and industrial center, Cleveland, he made a huge trade. Initially, his intense desire to win championships and cement his legacy drove him to leave Cleveland for Miami, allowing him to play with some of the best players in the game. While in Miami he went to the NBA Finals four straight years and won 2 Championships with his best friends Dwyane Wade and Chris Bosh. During those 4 years he matured greatly, developed as a player, and gained a deeper understanding of himself. In making his decision James realized his relationship with his hometown in Ohio was much more important than he understood when he left 4 years ago, more important even than the number of championship rings on his fingers. In going home to Cleveland, LeBron is trading “Not two, not three, not four…” in Miami for the chance to bring just one home to Cleveland. He made the trade!

How does James’ story help us to find a solution for the essential ego control required when being a successful trader? In his decision to return to Cleveland, LeBron balances ego with experience and executes a well-planned trade strategy:

• He identified value – his hometown of Akron and the undeveloped raw talent of Kyrie Irving.
• He chose a strategy to achieve his goals – using his wealth of knowledge and experience to develop younger players.
• He set a realistic, achievable target – one NBA Championship.
• He learned from his mistakes – there’s always a bigger fish (Boston, Dallas, San Antonio).
• He knows his patience will be tested, he knows discipline is key!

Successful traders do this in all time frames, every day.

Solution # 4 – Balance your ego with experience, just don’t buy your own highs!

Lewis has witnessed many traders who experience early success and loosen the rules. If you marginalize discipline the market will gift you with humility. His recommendation – avoid putting yourself in that position. Taking a page from our expert’s playbook…

Know your game. Play it with discipline. Do it again.

LeBron may never catch Michael Jordan and his six rings, but coming home to an ecstatic Cleveland fan base will give him the best odds to win long term. He’s even delivering cupcakes to his neighbors in Bath apologizing for the traffic jams!

Resources – If you really want to go deep into behavior,  here’s a link for the extremely popular book by Daniel Kahneman, well-known author and economic Nobel Prize winner. He reshapes cognitive psychology with his research. The two modes of thinking commonly agreed upon by researchers is related as System 1 and System 2, each responsible for aspects of our behavior.  Recommended for anyone interested human behavior, or investing.

Want more? Remember Sigmund Freud’s Personality Structure? He defined the ego as a mediator between our unconscious state that’s naturally pleasure seeking behavior and our conscience state where we hold our morals and ideals.

MOM’S TRADING RULE # 3 – KNOW YOURSELF

In the last two rules we discussed our motivation to focus on well executed trades and then the discipline required for that task.  In Rule # 3, Know Yourself, we’ll look at the emotional pitfalls we need under control to be a successful trader.  Now that I know what’s required… am I capable of controlling myself emotionally with my disciplined preparation?

“Do you break out in a cold sweat at the mere thought of risking something… such as your own capital? Do you think of trading like ‘gambling’, a long shot to make a million? Or can you handle risk in a disciplined fashion, knowing how much is ‘too much’ for both your capital and your constitution?

Trading is not for everyone. If risk makes you ill, on one hand, or if taking a risk brings out the recklessness in you, then trading is probably not for you. But if you can handle risk with discipline, then perhaps you can find a vocation or avocation as a trader. Only you can answer that question.”   Lewis Borsellino

Challenge # 3 – Handling risk – both your money and your sweat.

Lewis knows himself. His success trading in the pit and on the screen is significant evidence he is disciplined and he has successfully balanced the yin yang of internal conflict. Besides the foundation of applying sound technical analysis, trading strategies and overall risk management, he is cognizant of the impact fear and greed can have on the decision making process. He says, “Whenever I let my brain, tell my eyes, something different than what’s on the screen, it’s a mistake”.  The market will go down when the BIG GUYS decide, and your opinion has nothing to do with it.

Lewis tells you point blank – leave your opinions out of the market. And here’s why… opinions commit their owners emotionally. At some point, when the market proves the trader right or wrong, it sets up the roller coaster ride of fear and greed. Now YOU are ‘out of balance’ and this is where you’ll make your biggest mistakes. The graphic below shows the trading behavior associated with those emotions.

Emotional Patterned Behavior – created by your opinions

Emotion – FEAR   Response – Hesitation   Result – Under-trade

Emotion –  GREED   Response – Impulsive   Result – Over-trade

Solution # 3 – Focus on trading market generated information instead of your opinions.

We have a serious question to ask ourselves. Lewis conveys the point… the admission price to have an opportunity for success is two-fold. Besides always being prepared with my strategic plan incorporating risk management, I also need to be capable of avoiding emotional pitfalls to successfully manage my capital. If I’m under-trading out of fear or over-trading out of impulsiveness, I’m probably giving away money to those who are not. What’s the best way to keep those emotions under control?

Trading is not intuitive, but rather intuitively difficult. The goal of the disciplined trader is to use his analysis tools to observe the capital flow and then be well positioned to take advantage of the opportunities. That actually sounds pretty simple, as opposed to the emotional reactions shown above but it’s surprisingly difficult. Statistics say the success rate is low, reportedly 80 to 90% of people who try trading, fail. It’s not easy money. The opinionated emotional traders are simply transferring their capital from their account to the account of the unemotional, disciplined, prepared… trader.

Click here for a chart showing the actions of the ‘Opinionated Trader’ vs the ‘Disciplined Trader’ and compare how their trading actions differed.

Knowing those emotional pitfalls can help you avoid becoming their victim. Doing the work, being consistently prepared, increases your odds of joining the consistently profitable group!

Trade with discipline, check your opinion at the door, or be prepared to give your account to those that do.

Resources – Let Lewis Borsellino and the MOM team help you monitor market movement and make sound trading decisions! Sign up here. An amazing opportunity to profit while you learn!!! Registration is currently FREE!

Bad news article mentioned on chart visual here.

Good News article mentioned on chart visual here.

 

“WHY WE TRADE FUTURES” by Lewis Borsellino

 

“Is this the WASH OUT DAY???   Every time I wake up to a market that has sold off… this is my first thought. 

 All long term traders love the SHORT side. They believe markets go down faster than up… unless you’re caught in a short covering rally!  Look, the bulls are here to stay and I do not see them going away soon. As a trader you want corrections, NOT panic crashes. In 1987 I made 4.2 million dollars and in 1988, I made 90K. Why? Wall Street was totally devastated and had no customers. I saw the same phenomena take place in the 1990’s and again in 2000.

 After 30 years I make the same mistakes when I let my brain, tell my eyes, something other than what is on the computer screen. Corrections happen when the big guys decide they want out, not because you think it looks oversold.

 Be nimble! Leave your opinions for religion and politics. Low 1961.50 – high 1972.50… you’ve got to love the volatility! Higher? Lower? Which way it goes doesn’t matter, we are prepared to do both… That’s why we trade futures!!!!!!!!!!!!!!!”

LEWIS BORSELLINO

7/16/2014 – MOM ALERT TRADE MANAGEMENT EXAMPLE

MOM alerts give the user the opportunity to trade utilizing two units. This means one can trade the number of contracts desired based on one’s individual account size and risk management strategy. While each trade alert will vary slightly in stop and target parameters, alerts are only sent when a high probability opportunity appears using a minimum of a 2 to 1- reward to risk ratio. Click here for screen shot of this trade.

In the table below notice the trade entry, stop and projected targets using 2 Units as the measure. 2 units can be any number of contracts. In the example below we have used the minimum of 2 contracts, 4 contracts and 6 contracts and projected the results.

This table shows the estimated total trade.

Number of units (contracts)	Risk in ticks	Risk in $$$	Target 1 ticks	Target 1 $$$	Target 2 ticks	Target 2 $$$	Total Estimated Profit
2	6	75	12	150	16	200	350
4	12	150	24	300	32	400	700
6	18	225	36	450	48	650	1,050

This table shows the actual results. Momentum slowed, initial targets not achieved but exits were decently profitable while market structure offered extremely small risk with stop placement.

Number of units (contracts)	Risk in ticks	Risk in $$$	Target 1 ticks	Target 1 $$$	Target 2 ticks	Target 2 $$$	Total Actual Profit
2	6	75	5	62.50	7	87.50	150
4	12	150	10	125	14	175	300
6	18	225	15	187.50	21	262.5	450

It’s important to remember the only thing we can control is our risk. 

MOM’S TRADING RULE # 2 – DISCIPLINE IS KEY

In our first post we looked at Rule  #1: Trade for Success not Money. The challenge: keeping our impulses and emotions in check. The solution: focus on making a successful trade. When money becomes a distraction, fear and greed take over. Now we look at Rule #2: Discipline is the Key Quality.

“The ability to master your mind, your body and your emotions is the key to trading. The disciplined trader –regardless of profit or loss – comes back to trade another day. A great intellect, the ability to take on risk, or even a sense that you’re somehow ‘lucky’ mean nothing without discipline. For a trader, discipline means the ability to devise a trading plan, execute according to that plan, and to never deviate from that plan. “   Lewis Borsellino

Challenge #2 – Maintain discipline.

On Sunday, July 13^th, I watched Germany win its 4^th World Cup Title, officially ending a 24-year dry-spell. My first thoughts: that must take some serious discipline! So, I did a little research and made a list of the ways in which Germany’s team prepared their competitive edge.

• A staff of 40 was employed to study data on each opponent.
• The team physician used GPS tracking to follow their own players’ fitness to lower risk of injury.
• 1-year prior, they built their own training camp in Brazil’s tropical north, successfully acclimating their players to the humid conditions.
• Before the tournament, they completed a 10-day preparation camp at 3,300 feet above sea level to stimulate the production of oxygen-carrying red blood cells that increase stamina.

Their plan was carefully designed to create an edge and then executed to perfection! They studied their opponents. (A disciplined trader studies their chart to interpret the other players.) They put their players in the best practice environment to simulate live game conditions. (A disciplined trader uses focused practice.) They looked to reduce their overall risk by reducing player injury. (A disciplined trader has learned you cannot control reward, only risk.)

Lewis breaks the need for discipline into 3 components – the plan, the execution and the ability to never deviate from said plan. Even with a quality trading plan and prudent risk management, we can still make mistakes that affect our results. It’s easy to think with all the planning we’ve done that we are exhibiting great discipline, yet plenty of times the trade results don’t agree. “I think I’m doing everything right, but what am I doing wrong?”

Solution #2 – Keep track of your trading statistics.

Statistical data is big business for a reason. In preparation for the World Cup, Germany analyzed tons of statistical information – stats on their opponents, their own players, even the weather. Fortunately, we only need to keep track of ourselves. Understanding where there is a lag is crucial to improving performance.

One way to do this is through a trading journal. Tracking your trades solely by profit and loss only provides so much information. While building your performance record, it’s important to determine which spark plugs aren’t firing. The journal provides a way to keep track of more specific statistics beyond P&L. This will help to tease out where real progress is being made as well as where it isn’t.

What are the typical ways a trader makes mistakes? Statistically we actually know there are about 5 different ways traders usually break discipline:

1. We don’t take a planned trade.
2. We take an impulse trade.
3. We have a planned trade but hesitate on entry looking for further confirmation that the trade will work in our favor.
4. We enter a planned trade but get anxious and exit before our target.
5. Dom/Entry error – Hey, it happens!

All these seemingly small mistakes have serious impact on your bottom line. The solution is to put this information in your journal and do a periodic review. Learn to understand where you are making your errors and you’ll have a much better chance of correcting them and improving your performance. I promise, your own statistical profile will be very revealing!

Resources – This is a link to the well thought of Trading Journal Spreadsheet. It’s newly updated for 2014 and turns raw trading data into refined evaluation analysis.

Link to Bloomberg article mentioned above. Sorry the link no longer works!

 

Where it all started for Lewis

If you look closely, you can see me as Maury Kavritz’s clerk in the gold pit in 1981.

P.S. Not me in the fur coat!!!!

  youtube.com/watch?v=rGkkVgcyTog …

MOM’S TRADING RULE # 1- TRADE FOR SUCCESS NOT MONEY

Let’s start with what’s at the core, the I Ching, or the sum of all wisdom as experienced by Lewis Borsellino in his 25 years trading the S&P 500. From trading over 2,000 contracts a day at the zenith of pit activity to the more modest sizes on the screens today, he has developed 10 essential rules for successful trading.

To illustrate the rules, we will look at the challenges all traders face regardless of experience level. Then, we will discuss specific solutions traders can use to overcome these challenges. Last, we will provide you with additional resources to increase your understanding of both the challenge and it’s solution.

“Your motivation should be first and foremost to make a well-executed trade. If money alone is your motivation you will severely limit your chance of success. Why? Because focusing on money will raise all kinds of emotional issues, from fear to greed. It will make you afraid of losses to the point that you will abandon your discipline. It will tempt you to trade too often, too large and with too much risk.  Whereas if you focus on making solid, well-executed trades – even if the result is a losing trade that you exit quickly – you will reinforce your discipline and increase your trading potential.”    Lewis Borsellino

Challenge # 1 – Forget the money.

HA! Right? While easy to say, this is just plain difficult to do. We’ve all been there before: I plan my trade, I place my trade, now I’m filled. Once skin is in the game I get smarter, right? NO! Too often after entering a trade we start thinking about money, and the result: we move the stop. It’s in my favor – I’ll tighten my stop. It’s going against me – I’ll loosen my stop. It’s going lower – looks cheaper now. I liked it at 50 – I love it at 45! It’s going to the moon – I’ll wait and take profit higher!  All emotional TRAPS! Fear and or greed are now in control and those guys cannot be trusted to manage your money. It is important to note, while none of those concepts are necessarily wrong they are more than likely to lead to your financial demise if not executed as part of a well-planned strategy.

Solution # 1 – Focus on making one well-executed trade.

Then another. Then another. One at a time, each trade must be based on solid analysis. The key – plan your trade to fit within your specific risk parameters. This is how to keep your too often, too large and too high risk temptations in check. This is what allows one to maintain discipline, when the trade is against you. There will be losses, period. Everyone has losses! (Everyone!) This job requires that we not only accept loss, but plan for it by choosing both products to trade and trades that fit within our risk parameters. We’ll delve into risk and account size with more depth in a coming Rule, but for now, knowing that you need a well thought out plan designed for your account size is the key to quieting all those emotional voices that pop up in your head. This fundamental idea is the nucleus that binds all 10 of Lewis Borsellino’s trading rules.

Resources – A basic overview of what to include in a trading plan.

Example Trade – A trade example in the E-mini S&P showing rational, entry, stop and target based on July 11^th MOM pre-market commentary and update alerts during the day.

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. Past performance is not indicative of future results.