How I Came Back From My Worst Loss

Mohammed Isah is a private trader and an independent technical analyst. He initially traded stocks and now primarily focuses on forex. You can contact Mohammed on his pivot points reports and other inquiries at:isahmo@gmail.com.

Trading is an interesting profession and has no peak as in other occupations. It is in fact an endless journey of discovery of oneself and trading itself.

Trading for me at beginning was very tough not that I was not successful in other endeavors but I took it like every beginner thinking that it was easy.

With this perception, I approached trading without a plan or proper trading education on how the market works. What do you expect? Your guess is as good as mine. It was a total disaster after taking many losses; I was almost psychologically blown a way. At this stage, two important things happened to me, my P&L was in the red and I was down emotionally.

My Worst Trade

My worst loss that stands out in all my losses was a trade I took (bought EUR/USD) in anticipation of French Referendum thinking that it would be in favor of the European Union but alas I got a margin call after the result was negative.

Please do not ask me about a stop loss I did put a stop loss but I later removed it because I was so confident it was going to be a winning trade. Hey, can't you understand. I have been declaring losses so I thought this time round I would take a large position and cover all my losses. I was subsequently charged to court (trading), tried and found guilty (for losses). Punishment, six months without trading. While serving my term I embraced trading education especially technical analysis and trading psychology. So when I got a handle of certain strategies applying technical analysis and trading psychology I started trading again but not without losses but I followed my trading plan anyway and things improved especially when I became comfortable with losses as expenses in the business of trading.

Lessons

Never Trade Without A Trading Education - acquire proper trading education because the knowledge through trial and error in the market can be more expensive and time consuming than the normal trading education.

Never Trade Without A Plan - Having a trading plan is a most in this business if you want to succeed. This plan most specify and predetermine your entries, exits, stop loss, position size and your psychology (your emotion at the time you click enter). There could be more you could have on your plan but the most important thing is that you must follow it, because when you follow your plan you have a chance of succeeding in trading. You may be tempted to say do I have to follow this damn plan everyday, just go to a near by Airport and observe what pilots do everyday; they follow their plan and check each one before taking off. He can as well say, I feel better flying without my plan because I do it every time. That you know will be disastrous.

Do Not Be Smarter Than Your Emotion -What do traders do when they are tired? They wait for an opportunity instead of turning off their computers and call it a day they stay on waiting to initiate a position and when the trade turns out to be a loser they become angry adding to the tiredness. Hey, you know what, you can not win at trading if you are not in your right frame of mind. If you have problems with your spouse please do not trade, if you have a string of losses do not trade, take some time off and go over your losses until you know what went wrong before you can put on another trade. If any thing occupies your mind apart from the market and following your trading plan when you are ready to trade, do all you can to resolved it before you start trading for the day. If you cannot go golfing.

Cut Your Losses Shut And Let Your Winners Run -This one sounds familiar, right.The professionals do exactly as is stated here but what do novice traders do? They do the opposite by letting their losses run and cutting their winners shut.

In other words, they are patient with their losses and impatient with their winners thinking that their positions would come back. The hard truth is the market does not know whether you are winning or losing. It will go wherever it wants to go and do what it has been doing, which is moving up and down. It is now left to you to find opportunities within these up moves and down moves.

Becoming A Professional Trader Takes Time - This might sound funny. Do not ask any trader to tell you how many years it will take you to become a professional/experience trader. The truth is that real professional traders know that the education of a trader never ends. It is ongoing because market is not static, it changes so if you think you have acquired enough trading knowledge and market conditions change and you cannot cope with the changes you automatically become a learner. The fastest way to become a good trader is to learn from the professional traders (their strategies and how they apply them) taking into consideration your own psychological make up.

via - http://www.tradingmarkets.com

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What a successful daytrader does daily!

Before diving into Day Trading, please ask yourself if you have the following personality traits!

Confidence

This is perhaps the most important personality trait of good day traders. You won't succeed at day trading unless you have a high measure of confidence in yourself. Lack of self-confidence will result in doubt, indecision and second-guessing which, in turn, will lead to missed trading opportunities and frequent losses. You must believe in yourself when day trading. If not, you will be better off pursuing some other endeavour.

Discipline

In order to day trade successfully, you must develop a trading plan and consistently stick to it. You must avoid a "shooting from the hip" or a "seat of the pants approach" to day trading.

Get out of the market when you have reached your objective and do not let emotions like fear and greed influence your trading decisions.

Decisiveness

Good day traders do not hesitate to "pull the trigger" when entering and exiting trades. Traders who are in the habit of being tentative or indecisive will never become successful.

Passion

Most successful day traders have a true love or passion about their trading activities. If you do not enjoy reading charts, dealing with numbers, reading market news, interpreting quote screens, learning new trading strategies and working independently in a fast-paced environment, then day trading is probably not your cup of tea.

Ability to Accept Failure (and blame yourself for all failures)

Good day traders know that many of their trades will fail to meet the original objective. They do not, however seek to blame someone else for their loss, and they don't dwell on it. They attempt to learn from their mistakes and move on to the next trade.

Ability to Accept Risk (lose money)

Another personality trait of good traders is that they are comfortable with risk and are prepared to lose money from time to time. If you are afraid that you will, on occasion, lose money, then day trading is not for you.

Patience

Good traders do not rush into trades. They take the time to select good trading opportunities and do not place orders simply for the sake of holding a position in the markets at all times. On some market days, where few good trading opportunities exist, they are content to simply stand aside and wait.

Concentration

In day trading, a great deal of real-time information has to be absorbed, analyzed and acted upon in intense bursts throughout the trading day. This requires a great deal of concentration and stamina on the part of the trader, and the ability to avoid distractions. Day trading can be very hard work and a lack of concentration can doom a trader to failure.

These are the key personality traits that successful day traders tend to have in common! Do you??

via - www.Traderji.com

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Multicollinearity

Multicollinearity is a statistical term for a problem that is common in technical analysis. That is, when one unknowingly uses the same type of information more than once. Analysts need to be careful and not utilize technical indicators that reveal the same type of information.

Here is how John Bollinger states it: "A cardinal rule for the successful use of technical analysis requires avoiding multicollinearity amid indicators. Multicollinearity is simply the multiple counting of the same information. The use of four different indicators all derived from the same series of closing prices to confirm each other is a perfect example."

The issue of multicollinearity is a serious issue in technical analysis when your money is at stake. It is a problem because collinear variables contribute redundant information and can cause other variables to appear to be less important than they really are. One of the real problems is that sometimes multicollinearity is difficult to spot.

Technical indicators should be arranged in categories to keep from using too many from the same category. Here is a table that categorizes the indicators available at StockCharts.com:

Category		Indicators
Momentum		Rate of Change (ROC) Stochastics (%K, %D) Relative Strength Index (RSI) Commodity Channel Index (CCI) Williams %R (Wm%R) StochRSI TRIX Ultimate Oscillator (ULT) Aroon
Trend		Moving Averages Moving Average Convergence Divergence (MACD) Average True Range (ATR) Wilder's DMI (ADX) Price Oscillator (PPO)
Volume		Accumulation Distribution Chaikin Money Flow (CMF) Volume Rate of Change Volume Oscillator (PVO) Demand Index On Balance Volume (OBV) Money Flow Index

The best way to quickly determine if an indicator is collinear with another one is to chart it. Make sure you have enough data on the chart to get a good indication. If they basically rise and fall in about the same areas, the odds are that they are collinear and you should just use one of them.

The first chart below shows some examples of indicators that are collinear. Notice that all three indicators are basically saying the same thing. If your analysis was that this was supportive information, you would be falling into the multicollinearity trap. Pick one of the indicators for your analysis and do not use the others.

Below are some examples of indicators that are not collinear. These three are not similar at all and, when interpreted correctly, each will give different information. It may be supportive or it may not.

Bottom Line: If you are randomly selecting indicators to support your analysis, you will more than likely fall into the multicollinearity trap of using multiple indicators that are all saying the same thing. They are not giving you any additional information; in fact, they are restricting your overall view of the market. Don't search for supporting information among collinear indicators, it is just misleading

via - http://stockcharts.com/help/doku.php?id=chart_school:trading_strategies:multicollinearity

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5 minute intraday trading strategy

This strategy is originally created by Philip Nell a veteran stock trader with more then 10 years experience. This has been tested for trading EUR/USD and GBP/USD. I like the way it define market motion. Though this is a great trading system, I personally don’t use this since I don’t like trading in 5 minute time frame.

It’s quite simple, what you need is 50 SMA, 21 EMA and 10 EMA attached on your 5M Chart. Open position when the angle of the 50 Simple moving average are greater than 20 degrees and the price retrace back into the zone of the 21 Exponential moving average and the 10 Exponential moving average. Set stoploss at 6 pips plus spread and profit taking at 8-10 pips. Move stoploss to breakeven as soon as 6 pips gain is obtained.

Below are some pictures for your reference:

via - http://www.forextac.com/5-minute-intraday-trading-strategy.html

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200Day Moving Average

Granville a respected analyst lists eight basic rules for interpreting the 200 day moving average charts.

1. If the 200 day average line flattens out or advances following a decline, and the price of the stock penetrates that average line on the upside, this constitutes a major buying signal.

2. If the price of the stock falls below the average line while the average line is still rising, this also is a buy signal.

3. If the stock price is above the 200 day line and declines towards it, but fails to go through and instead it turns up again, this is a buying signal.

4. If a stock price falls too fast and far below a declining average line, a short term rebound towards the line may be expected.

5. If the average line flattens out or declines following a rise, and the stock price penetrates that line on the down side, this constitutes a major selling signal.

6. If the price of the stock rises above the average line while the average line is still falling, this also is a selling signal.

7. If the stock price is below the average line a rises towards it, but it fails to go through and instead turns down again, this is a selling signal.

8. If the stock price rises too fast above a rising average line, a short term reaction may be expected.

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Phil Newton's Break out Strategy

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BANDS AND BANDS AND CHANNELS

Trading bands and trading channel are related. Both chart patterns act as a restraint on price activity, confining it within defined boundaries. The channel defines trend behaviour. The band defines support and resistance behaviour and can be used to set price targets.

The trading channel is constructed with two trend sloping trend lines. These are parallel lines and as with any trend line, their value changes daily. The lines show changing sentiment about value. A trading channel shows the limits of this changing sentiment as price bounces from support and retreats from resistance.

The trading band is defined by support and resistance levels where the value remains constant. These are horizontal parallel lines. Price stops trending and develops a sideways movement. These patterns are more useful because they are used to project upside and downside targets. When price moves above the resistance level then the width of the trading and is used to set the potential upside target.

Both trading bands and trading channels are range-bound chart features. They provide short term trading opportunities as price moves between the support and resistance levels. However the range bound trend continuation of a trading channel is traded differently from the trading band with its potential for trade band breakout opportunities.

By Daryl Guppy

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TREND LINE CONSTRUCTION

Look at the chart display. What is the trend for prices? Quite clearly they are going down. If we already have purchased this counter at $7.50, we should be worried. If we are potential buyers of this counter then the price move or break above $6.70 gives us a reason to buy the stock. The trend line gives us a way to decide which price action is significant, but only if it is accurately drawn.

We use a straight edge trend line to tell us which direction prices are moving and to give us a better way to judge the trend. If prices close under the up trend line then it suggests the stock price is falling. Ideally we would want to get out to this stock, selling it to collect our profits and to protect ourselves against loss. We get this exit signal when there is a close, or a series of closes, below the trend line.

In a downtrend, the line is placed along the price highs. A close above this line tells traders the trend may be about to change direction. This is used as an entry signal. Where we draw the trend line is important because it could cost us money.

When we think about buying a stock many traders try to buy a trend breakout. This is when a downtrend turns to an uptrend and prices ‘break out’ above the trend line. Traders try to buy the stock near the bottom just as the stock price starts to move up. They get a buy signal when the price closes above the downtrend line.

Up trend or down trend, the principles of drawing the trend line are the same. An accurate trend line uses the information available from a bar or candlestick chart. Good trend lines need to use the high or the low prices for accuracy. They are not easy to plot accurately to a line chart.

These are the construction rules:

1) The line is placed along the lows of the price bars or candlesticks in a rising trend. An up trend is defined by higher lows each day. This is the price element we want to track, so the line goes underneath. If prices fall below this line then the trend may change into a downtrend.

A falling trend is defined by the failure of prices to make new highs each day. We track this by placing the downtrend line along the highs as shown in the chart.

2) The trend line uses the extremes of the price bars or candle sticks. This is the high or the low price. These extremes are important because a close beyond the extreme tells traders the trend might be changing. This is an entry, or an exit, signal.

3)The trend line starts at the very extreme high, or low. This is called a pivot point.

4) The trend line should touch the maximum number of possible price bar or candlestick extremities. This means we do not exclude too many, nor do we go for the maximum number of hits. We want to use the trend line as a trading signal, so we are interested in closes beyond the extremes of the existing trend because these give the best trading signals

5) The more often a trend line is hit by price extremes, but not broken, the more powerful the trend line signal. A trend line that has been hit 5 times, but not broken, is very strong. So when prices do close beyond the trend line it is a very strong signal that the trend is changing.

On the chart trend line 1 is a correctly drawn trend line. It touches the optimum number of price extremes. Trend line 2 shows the general direction of prices. Trend line 2 does not give any useful trading signals and prices move above and below this line all the time. Trend line 1 shows us when the downtrend has finished. The close above t trend line 1 clearly signals the beginning of a new up trend and provides an entry signal.

Straight edge trend lines are a very powerful trading signals, but they must be placed correctly. They are used to show the short term trend - perhaps days or weeks - the intermediate term trend - perhaps weeks or months - and the long term trend - perhaps months or even years. Long term trends are best seen on a weekly bar or candlestick chart.

Not all trends are easily defined with a straight edge trend line.

By Daryl Guppy

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THE RELATIVE STRENGTH INDICATOR AND DIVERGENCE

Technical indicators are constructed by manipulating some aspect of price such as a moving average of prices over a 10 day period. The Relative Strength Indicator (RSI) tries to anticipate a change in the trend. This is a leading indicator of a trend change. The results are used to deliver messages about the strength of the market. It is called an oscillator because the indicator readings are converted into percentage results which range from 0% to 100%. The position of each day’s indicator reading gives the trader an indication of the strength, or weakness, of the existing price trend.
The RSI is calculated by monitoring changes in the closing prices of the stock. The number of higher closes is compared to the number of lower closes for the selected period. The RSI compares the internal strength of a stock by looking at the average of the upwards price changes and comparing it with the average of the downward price changes. The results are expressed as a percentage, providing the upper and lower boundaries. The plotted results oscillate between these two levels and give traders information about the speed and acceleration of the changes. Traders use either a 14, 9, or 7 day period in the Relative Strength Calculation.
In this sense the RSI is very similar to a stochastic and uses similar principles. Where the stochastic quantifies the ability of the market to close near the high or the low of the day, the RSI quantifies the strength of the way the market moves higher, or lower. The over-bought and over-sold signals are the same as any oscillator, although with an RSI they are traditionally set at 70% and 30%.
The most significant trading signal delivered by any oscillator style indicator is a divergence signal. This sounds complicated but it just means that the significant valley patterns shown by the RSI trend in the opposite direction to the significant valley patterns as shown by the price line chart. A valley is created by two distinct lows that each precede a rally from a downtrend. This builds a valley in the price chart. The lows of these valleys are joined with a short trend line as shown.
The corresponding lows on the RSI indicator are also joined by a short trend line. When the RSI line slopes differently from the price chart line, a divergence occurs. When these valleys form below the 30% area on the RSI, or form peaks above the 70% level, they are most reliable. Oscillator activity between these levels is not used to find divergence signals. Divergence signals give the trader an advantage by confirming an entry into a downtrend as it weakens and just before it turns into an up trend. It is also used to get out of an up trend as it weakens, and before it collapses into a downtrend. The divergence signal does not occur every time a trend changes, but when it does, it delivers a strong confirmation signal that a trend break is likely.
RSI divergence signals often appear in advance of a trend change, but they are not very good at suggesting the time of a trend change. The divergence signal may appear just as the trend changes, as in the chart extract, or several weeks before. Traders use the RSI divergence as an early warning signal to enable them to prepare for a trend change.
When the RSI and price chart lines move in the same way we get a confirming signal that the existing price trend is unlikely to change. These signals are not very important because we can get the same information from just looking at the chart.
The RSI is one of the very few oscillator style indicators where trend lines and support and resistance lines can be effectively used. These are used as signals to confirm the trend shown on the price chart. When other chart patterns suggest action, then the RSI trend line might also confirm this. When the RSI is used like this it does not give the trader any distinct advantage.

-By Daryl Guppy

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Gap Trading Tips

1. Know the zone! Where the gap opens relative to prior day support and resistance (e.g. Open, High, Low, Close) will greatly influence its probabilities of filling, as well as the optimal placement of your stop and target.
2. It’s a three legged stool. To maximize profits focus on gap selection, stop placement, and target optimization. It takes all three.
3. Don’t try to kiss all the pretty girls (or guys)! With gap trading, it pays to be selective. So, when in doubt, sit it out.
4. The return may not be worth the risk. Just because a gap is small and has a high probability of filling does not mean that it is worth trading. Profit expectancy, not probability of winning, is the key.
5. ‘Tis the season! Understanding the historical calendar tendencies of your market can help affirm a winning setup, as well as help you avoid losers.
6. The worse it looks, the better it works. And vice versa (most of the time). Don’t let pre-market action overly influence your decision to fade a gap or not.
7. The news is noise. Don’t worry about the financial or economic news that caused the gap. It will only add unnecessary confusion and second-guessing.
8. Low hanging fruit is the sweetest. Entering at the market open catches all the easy winners. Waiting to enter after the open misses the easiest winners and catches all of the losers.
9. Like money sitting on a table... Many gap setups are prone to continuing through the prior close after filling. Know the personality of your gap setup and when to hold through the gap fill for an extended target, or when to close before the gap fills.
10. Size matters. Trade the position size that does not overly stress you, financially or emotionally, even if you have three or four losers in a row.
11. Watch out for the BLUDs. Fading gaps Below the Low of a (prior) Up Day is only profitable about 50% of the time historically.
12. The three amigos. Don’t forget about the other two gap plays: “Forget the Fade” (i.e. go-with) and “Fade the Fill.” They can add winning setups to your trading tool box.
13. Focus on the horizon. Let the long term probabilities work to your advantage and don’t try to guess which trade will work or not. Have a plan, follow your rules, and accept that losers are the cost of doing business.

via - http://www.thegapguy.com

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