MOM’S TRADING RULE # 9 – AFTER THREE LOSING TRADES IN A ROW, TAKE A BREAK.

In Rule # 8 we learn true discipline is not letting your losers or your winners affect you negatively. In Rule # 9 we tackle the work ethic problem many retail traders find challenging, coming from other careers.

“This is not the time to take on more risk, but rather to become extremely disciplined. Sit on the sidelines for a while. Watch the market. Clear your head. Re-evaluate your strategy, and then put on another trade. Losses can shake your confidence and tempt you to become emotional (fear/greed). But if you take a break, you can gather your wits and regain your composure more quickly than if you become very emotional and angry at yourself and the market.”    Lewis Borsellino

Challenge # 9 – Stop working while I’m working?

Trading isn’t like most other jobs. You can work hard all day, all week, and wind up owing the boss money at the end. Lewis tells us from his experience, STOP after 3 losing trades in a row. Why NOT keep working? Most retail traders have had other careers prior to their trading careers and in most careers the common work ethic is to continue to work till you have achieved your goal. If you’ve applied this to your trading, you may be experiencing stimulus overload, making your trading job possibly much harder than it should be.

We group things in 3’s because scientific research tells us for the majority of our population, our brain remembers 3 things quite easily, but 4 or more things to remember produce diminishing results. Examples are numerous. The concept of 3 is utilized early starting with nursery rhymes of “The Three Little Pigs” and “Goldilocks and the Three Bears”. We size clothing small, med and large. We award our athletes Gold, Bronze and Silver. We define elements as earth, wind and fire. Even our ice cream flavors started with Vanilla, Chocolate and Strawberry. Airlines tried to hide 3 classes by naming them, First Class, Business Class and Economy. I know when Starbucks came out with 4 drink sizes, small, tall, Grande and Venti… I asked for a medium. The human brain either does not care or does not remember what is beyond third. Everyone can probably name one of the three first astronauts to walk on the moon but can you name the fourth astronaut? Knowing there is nothing more important to our success than being able to learn from our mistakes, trading beyond three losses without breaking; we diminish our ability to internalize corrective behavior by exceeding our brains ability to effectively remember exactly what we need to know!

Solution # 9 – Work smarter not longer.

There are 3 key reasons as traders we want to incorporate Rule # 9 – 3 Losers in a row, take a break.

• Helps preserve the account. Questions? Go to Rule # 5 and review the R multiple concept.
• Gives the trader time to regain composure and is a tactic to avoid slipping into the emotional response, triggering negative patterned behavior that will impact trading decisions.
• Gives the trader the best odds of learning from his errors based on our brains natural ability to process information, without overload.

Make the break useful. While you don’t need to stop working, just trading, the disciplined trader has a list of things to do during this unexpected break. Lewis tells us to re-evaluate our strategy. While there can be any number of reasons why three consecutive trades fail, a common trader challenge is being caught in a larger time frame aggressive re-pricing move while trading the most recent tempo. The concept of top-down analysis helps address this issue. Successful traders start with the larger time frame and work down to the time frame they will be using to enter the trade, this keeps them informed about the larger time frame trends, if any. Too much time spent at the micro-level makes it hard to see the forest for the trees.

A trading break also gives the trader time to re-evaluate what isn’t working today. Much like the triathlete needs to be competent at 3 different sports, traders also have 3 areas of competency to be addressed. As retail traders, we wear 3 hats, the analysis hat, the trade manager hat and the self-coaching hat. Use this downtime to reflect on which ‘team member’ didn’t show up for work today! Success rarely exists without all 3!

Resources – Maybe you are new and need to find a broker or maybe you are dissatisfied with your current broker. There is something special, something actually different that is available to you. Stage Five is a unique brokerage. This team doesn’t come from the brokerage side of the business but their shared vision is to use their talents to make a difference in their client’s lives and they are doing this in 3 steps. First, they provide regular free focused education, not just a bunch of webinars with other shops selling their worthless crap. Second, they promote paper-trading and doing trading homework! (Remember, they don’t make money when you aren’t trading.) Unlike many brokerages that expect a swift ‘turnover’ with retail customers (that’s short for blowing out one’s account), Stage Five wants you to be around for a long time and they are doing their part to help! Third, Stage Five is actually changing the way their clients interact with the markets, improving their overall results. Give Anthony Giacomin, Managing Partner a call, he really understands the needs of the retail trading community and has an intense passion for your positive results.

Read more about the power of three.

MOM’S TRADING RULE # 8 – LOVE YOUR LOSERS LIKE YOU LOVE YOUR WINNERS

In Rule # 8 we’ll discuss keeping a long time-frame perspective on the review of your trade management. Those daily stats you’ve been keeping are a great start for the micro view of individual trades. Periodic review of your statistics from a macro-view can help reveal patterns of trading behavior that can be shaped and improved.

“Losing trades will be your best teachers. When you have a losing trade, it’s because of some flaw in your analysis or your judgment. Or perhaps the market simply didn’t do what you thought it would. When you have a losing trade, something is out of sync with the market. Examine what went wrong – objectively – then adjust your thinking, if necessary, and enter the trade again.”   Lewis Borsellino

Challenge # 8 – Staring at yourself in the mirror.

Human nature at work… we hate taking the losing trade. Also human nature, disassociate from that event. It wasn’t me. I didn’t mean to do that, next! Anger or embarrassment, are common reactions. The result is you may not be taking advantage of what you paid for… your best teacher.  The market generated results of your trade and your ongoing spreadsheet provide your best feedback tool for improving your trading results.

Sports analogies make easy comparisons to trading because they are both professions that are competitive and performance oriented. Having just received my invite to this season’s Fantasy Football Office Pool, I turned to the Bleacher Report to see what’s up with the Chicago Bears preseason. This article, Breaking Down a Sizzling Start to the Preseason for Bears QB Jay Cutler, talks about Jay’s performance, and begins the task of building his season long statistical score card with filling in pre-season numbers. By the end of the season sports analysts will know a lot more about Jay than, how many completions, how many touchdowns and how many times he got sacked. They’ll have a complete ‘profile’ of Jay’s strengths and skills as well as what upsets his balance. His stats tell some specific detail but his profile is what’s revealing. We need to be able to do a critical micro-view, individual trade review but also have the macro-view context in mind. Suggestions?

Solution # 8 –  Be objective, it’s not personal.

Lewis tells you the key is objectivity in your review. Only with objectivity will you be fully able to understand and leverage your strengths and skills. Reality with football is the same with trading. Professionals work on improving their performance by reviewing everything, wins and losses. Lewis carried his disciplined mindset to football, as offensive coordinator for the Broncos, coaching Montini High School to win 4 consecutive Class 5A titles. Imagine the daily work to be prepared for coaching each player, each game strategy, each game, each season. That is what disciplined passion can accomplish!

So take this page from Lewis, expert in both trading and coaching and love your losing trades as much as you love your winning trades. It’s a normal reaction to bask in the glow of a good wining trade and disassociate from the losing trade. However…

True discipline is when you prevent either from affecting you negatively.

Examples of patterns you might see in a monthly review that can be addressed.

• Better or worse trading on a particular day of the week.
• Better or worse trading on a specific product.
• Trading better in the morning vs the afternoon.
• Overtrading around news events.
• Picking bottoms or tops on trend days.
• Trading with no plan.
• Consistently not reaching targets.
• Consistently playing with stops causing losses.
• Consistently fighting larger time-frame trend or just getting caught unaware of supply or demand on the larger time frame. (more in Rule # 9)

There’s an old joke about saying to your doctor, doc, it hurts when I do this… and the doctor replies… don’t do that. Well sounds too good to be true but sometimes we’re so busy looking through the microscope that we don’t notice the elephant in the room. Doing a longer term objective review gives you the chance to find those patterns that make you more successful and those that cause a lag to your success. Hey who knows, maybe you’ll find out you’re more profitable if you take Friday afternoons off!

Resources – This really well-done info-graphic is worth a look, especially if you find your pattern is fighting the trend.

And if you find your Friday afternoon free….

8/13/2014 – MOM ALERT, TRADE MANAGEMENT EXAMPLE

MAN OVER MARKET, (MOM) alerts give the registered user access to the team’s proprietary analysis and timely updates delivered with a post, announced by an audio alert so you can keep the window minimized and not miss the update. Lewis Borsellino, co-founder of MOM delivers market updates on an as-needed basis, throughout the trading day. Team members, Pat Tabet and Charles Cochran post extensive pre-market plans with daily actionable levels on several different markets.

Below is an example of how a registered user could take trading action based on the alerts on 8/13.

Pre-market update uses 1932 as bull/bear zone. A push above 1941 will have buyers in control with destination likely the gap, between 1952.75 and 1956.50. Last week’s high is 1937.50.

Trade – Market opens gap up, a pullback to yesterday’s range below 1936 is rejected in A period. B period one-ticks A period and rallies, leaving a weak low but key closed above last week’s high, 1937.50 on increasing volume.

Long 2 units in D period at 1939.25, a MOM alert confirming buyers on ES, NQ, TF, YM, all markets showing buying interest.

MOM alert, BUYERS IN CONTROL at 10:06 am CT.

• Target 1 1942.50 – low of week 7/18/2014, achieved, return $162.50 per contract.
• Target 2 1945.25 – low of week 7/11/2014, achieved, return $300 per contract.
• Extended targets with more than 2 units, 1949, 1952.75. 1956.50.
• Total return on minimum of 2 contracts, $462.50.
• Stop 2 ticks below D period low, 1938.25, very low risk opportunity, $100.

Reward to Risk is over 4 to 1. A 4.6R return is achieved.

Note as always, individual results will vary with stops, targets, and of course, trade management.

Register now for FREE to start receiving daily pre-market analysis from the Man Over Market team with levels and updates throughout the day.

Click on the Education link and check out Inside Edge professional software, the charts that come standard are pure gold!

MOM’S TRADING RULE # 7 – KNOW WHEN TO TRADE AND WHEN TO WAIT

In Rule # 7 we will continue with more trade management concepts. In Rule # 6 we looked at the first concept; planning your return to be a multiple of your risk. The next concept is the rotational nature of the markets. Knowing when to participate and when it’s better to wait is a crucial element in the disciplined trader’s toolbox.

“Trade when your analysis, your system and your strategy say that you have a buy or sell to execute. If the market doesn’t have a clear direction, then wait on the sidelines until it does. Keep your mind on the market, but keep your money out of it.”   Lewis Borsellino

Challenge # 7 – What should I be looking for to take a position and why wait?

Lewis tells us the reason for trading futures is volatility! Volatility is a trader’s paradise, higher or lower doesn’t matter, its movement we crave. Traders last week, like most weeks, had to be nimble and willing to change their bias on a dime. The patience to wait for an opportunity to setup and then take decisive action when that opportunity is presented is a critical skill for a trader. Of course I wondered what sport required that combination of quiet observation followed by explosive action; that ability to quiet internal noise, to watch and feel for that precise moment to participate… so they can join in seamlessly.  Surfers sit on their boards watching, feeling the movement of the water… they feel the energy build, they count time between swells and at the right moment they launch and pace their paddling to catch the lip of the wave for the perfect position to ride the barrel. Late… and they miss the crest, early… and the wave can fold over them. My surfing research revealed the perfect description given by an obviously talented surfer talking about his experience. Listen to this ”technical” description of his performance. ***

Solution # 7 – Understand and identify market movement before entering a trade.

The same way the surfer smacks the lip… the trader needs to time his entry to ride the barrel or get pitted! How many times have you entered long on an uptrend day only to get stopped out? The market moves in patterns, specifically the 4 stage market process of accumulation, markup, distribution and decline… and it happens on all time frames. Whether it is the long time-frame seasonal tendency or the micro time-frame 610 tick chart, we can see that pattern constantly repeated. The disciplined trader uses these patterns of movement to his advantage.

Trading wave patterns can best be expressed as rotations that vary in intensity and duration at any given moment depending upon the participants. On a day-trading basis, traders use rotations to help them surf the trend or bracket balance.

Lewis tells you if you have a trade, execute. If not, wait. You can’t ride the barrel if there’s no wave action, you have to wait… yet be prepared for action. Let’s look at an example from a recent day when the market moved up 13.5 points after a MOM buy alert was given. Notice the up rotations, the down rotations and the point swings shown in the blue boxes. We can see the market moved from 1910 to 1923.50 but did so by auctioning back and forth, moving with greater intensity and duration on the upswings, the downswings shallow by comparison, illustrating a directional move. During the course of the day, as shown on the 3 minute chart, the market went through accumulation, markup, distribution and decline several times before reaching the destination, making it very easy to lose money going in the direction of the trend if your entries were not timed to be with the wave. If you jump in long at the high of the swing… you will… get pitted!

Resources – Registration for a free 5 day trial for Inside Edge software can be found here. This beautiful and extremely helpful software, in addition to the 6 different types of charts available from the profile to the footprint, allows you to do a look-back over a user specified period of time to determine average rotations by time-frame!

The surfer checks the weather channel before heading out the door so he knows if today’s weather is conducive to his kind of surfing. The trader checks the VIX for a measure of implied volatility.

Here’s a great info-graphic – Understanding Market Structure

8/6/2014 – MOM ALERT, TRADE MANAGEMENT EXAMPLE

MOM alerts give the registered user access to the team’s proprietary analysis and vast trading experience. This gives the retail trader an opportunity to profit riding the wave of institutional order flow when MOM sends an alert. The following 2 trades are examples from today’s alerts.

Initial pre-market report looked at downside references. Buying at open was strong, MOM’s proprietary pivot at 1909.75 indicated a 5 minute close above that price gives buyers control.

 BUYERS IN CONTROL ALERT is issued at 8:42 AM CT (click here for chart)

• How do i get in? On a 5 minute chart, enter on a pullback into the confirming candle. Entry with 2 lot at 1912.
• Where is my stop? A 5 minute close below 1909.75 or 2 points should a fast break occur. Risk on 2 contracts is approximately $225.00.
• What are my targets? Targets are yesterday’s references –
  • Target 1 – vpoc – 1915
  • single prints btw 1917.75-1919.75 (noted as initial resistance in pre-market, watch for acceptance/rejection)
  • Target 2 – poc – 1923.50

Target 1 – achieved, return $150     Target 2 – achieved, return $550

Total risk – $225    Total return – $700  

Risk to Reward is approximately 3 to 1.    A 3R return was achieved.

SELLERS IN CONTROL ALERT is issued at 12:56 PM CT

• Entry – on 5 minute chart, enter on pullback into the confirming candle. Entry with 2 lot at 1914.50.
• Stop is a 5 minute close above 1915. A 2 point stop is used initially risking again $225.00
• Target is VAL low at 1912.
• 1:25 PM 5 Minute candle closes above 1915, exiting trade at 1916

Targets not achieved, total loss $150

Total return for the day using 2 lots is $550

MOM’S TRADING RULE # 6 – LET PROFITS RUN, CUT LOSSES QUICKLY

The first five rules have focused more on the psychological aspects of being a successful trader. Each of the next four rules will present a concept the disciplined trader needs to apply to his trade management to have any chance of long term success. In Rule # 6, we look at the concept of risk vs reward and how we can increase our odds for success using R multiples to define risk related to profit.

“When the market goes against you and you hit your pre-determined stop, exit the trade. Period. Exit when the loss is a small one. Then reevaluate your strategy and execute a new trade. Keeping your losses small will keep you in the game. Profits take care of themselves, as long as you execute according to your plan. When you place a trade, know in advance where you’ll exit for a profit. When the market reaches that level, exit the position. If your technical analysis tells you the market still has some room to move, then scale out of the position. But execute according to your plan. Remember, you’ll never go broke taking a profit.”   Lewis Borsellino

Challenge # 6 – Keeping your equity curve from flat-lining or worse.

In the movie “Moneyball: The Art of Winning an Unfair Game” written by Michael Lewis, staring Brad Pitt, the general manager of the Oakland Athletics baseball team used an analytic evidence-based approach to build a team that was able to compete with major market teams for about a third of the cost. By re-evaluating the strategies that produce wins on the field and selection of players based on risk vs reward,  the A’s GM Billy Beane broke away from the old model of player analysis which he thought was too subjective. If Beane needed a player that had a high on-base percentage, he looked for the player that had the best statistics to fill that specific requirement. Without the bias of emotional subjective opinion Beane found players much less expensive to acquire. As a trader I see that the A’s capped their risk with relatively low salaries and promoted the best opportunity for their profits to run by selecting the player for the position based on his statistical performance, not a judgment call or opinion. Agree with this approach or not, it generated enough success to change the way many major league front offices do business. Many teams now have full-time analysts measuring in-game activity with ‘sabermetrics’, baseball’s term for analysis of player statistics. The result is teams are using market generated information to make smart decisions around team strategy.

Lewis tells you keeping losses small – IS – what keeps you in the game. Following your plan, profits will come. Our goal then becomes a plan that lets us survive our learning curve and that realistically keeps the odds in our favor for long term success. How do I really keep my losers small and let my winners run?

Solution # 6 – ‘Tradermetrics’ – Understand R Multiples so you can WIN despite losing.

Successful traders put the odds in their favor. To do this we need to understand Risk (R) and risk multiples. On a per-trade basis, we will define risk (R) as how much you stand to lose per unit of investment if the position moves against you. Your total R is the risk per unit multiplied by the number of units. In stocks, the initial risk is per share, in futures it’s per contract.

There are 3 essentials to consider when planning your risk allowance.

• Your account capital, this is your business inventory, it has a finite number. Don’t put your inventory at risk without doing your due diligence on ‘tradermetrics’. Paper- trade your strategy before putting your inventory at risk. Earn your right to add size.
• Margin requirements, determines your leverage which defines your overall risk. Futures are popular because of the great leverage, which magnify your gains. This is also true of losses.
• Your learning curve, just because you have the financial ability to trade a 10 lot, does not mean you have the mental ability to handle the risk. That is why it is a sound business practice to trade in units. You might start by trading 2 contracts or 2 units. As your skill increases and your account survives your learning curve, you can trade 4, 6, 8 contracts still applying the 2 unit strategy, or moving to a 3 or 4 unit strategy.

The key is to understand when you risk – R – your return should be a multiple of R.

Below we’ll compare two hypothetical traders to explain R multiples and the effect on your inventory. These situations in reality would not exist in this form. The trade log wouldn’t look anything like this, some winners won’t reach the target, some will exceed. Some stops will be less, but NEVER should they be larger.  Over a significant number of samples however, the results on your P&L will be the same as illustrated below.

Trader A – uses a 1R to 1R strategy. Every time he risks a dollar, he stands to make a dollar. We will give him the same winning percentage a coin toss would produce, 50%, which is a much better win percentage than that which most traders begin. If he starts with a 10k account and risks 500 per trade, but only wins 500 per trade and losses half the time what’s the result after 20 trades? His account will be at break even minus the cost of doing business. He made 5K and lost 5K. Trader A’s account is just under 10K.

Trader B – uses a 1R to 3R strategy. Every time he risks a dollar, he stands to make three dollars, we give him the same 50% win rate. This trader also starts with 10K but every time he risks 500 he has the potential to make 1500. After 20 trades he has won 10 trades X 1500 = 15K and lost 10 trades X 500 = 5K. Ahead by close to 10K, including the cost of doing business, Trader B’s account is just under 20K.

To put this in perspective, change the winning percentage to 40% or 30%, which is more realistic for the novice trader, and compute the numbers again. Futures move fast, it’s easy to get in and out quickly, and the result is that is easy to be undisciplined and take impulsive trades. Thinking in terms of ‘trademetrics’ and R multiple on a per trade basis is crucial to helping you survive your learning curve and essential to your long term profitability.

Resources –  I was lucky enough to get this book as a gift. Van Tharp’s Definitive Guide To Position Sizing. This is the most comprehensive book on position sizing around. 90% of the performance variation of professional traders is due to position sizing. If you’ve done your due diligence on your paper trading and are ready to put your inventory to work, this is a great book.

Recommended in Rule 2 and 4, the Trading Journal Spreadsheet is your place to record ‘tradermetrics’ and  has a useful automatic position sizer based on your pre-loaded account data. Your updated daily trade data automatically adjusts the recommended size as the account grows or declines. While you don’t need to refer to this on every trade, you can have the basic information available to help your planning.