If you want to be a successful trader, you must make sure you do not deny reality in any phase of your trading. You cannot deny losses, price direction, mistakes you make, being undercapitalized, or a whole host of things you would rather not think about.

Many traders think the best way to deal with unpleasant ideas, events, or personal character flaws is to shut their eyes and pretend they don’t exist.

Let’s face it, trading can be difficult, at times very difficult and it’s essential that you focus on reality. Denial takes your focus away from the very thing you need to be concentrating on—the action of prices—regardless of time frame. Your mind must be clear so that you can look at the market and see what is really there.

The way I learned to handle denial was to simply write down and confront all possible ideas I had trouble accepting. Some thoughts I could fix and others I just had to accept. But facing the truth of what and who you are is the only way to deal with denial. You have to realize that for the most part the only things you can change are in yourself. Other things you just have to accept. You have to accept the reality of slippage, for example. You have to realize that indicators often give false signals and that there is no magic moving average nor is there a magical oscillator.

You have to realize that some winning trades are just lucky trades and had nothing to do with your skill as a trader. By the same token, you will also experience the bad luck of having prices make a sudden and unexpected move against you.

Rather than wasting your time in denial, concentrate your mental energies on improving yourself and improving your trading skills. Work at improving your abilities to observe. Realize that you have to survive the markets in order to benefit from the experience of the markets.

There is really only one true problem with your trading—that problem is you! However, the problem manifests in two ways:

1. Market conditions have changed and you haven’t.
2. You are no longer doing what you did when you were winning. You have drifted. You are not consistent.

The first aspect of the problem is due to poor observation. The market has changed and you haven’t changed with it. Poor observation stems from a variety of lesser but very important problems. You have married a market, or a trade. You may have allowed your ego to get the best of you and you are no longer humble. I’ve named just a couple here. I challenge you to think about the many things that can distract you from seeing when market conditions have changed. Make a list of those things and confront them.

The second aspect of the problem stems from inconsistency. Here again, you should make a list of those things that cause you to be inconsistent.

“Perhaps I was a good trader at one time, but the market conditions have changed and I may not be able to keep my reputation up.” This is an issue that all traders face at some point: keeping up their reputation. When one makes big profits trading, it’s tempting to tell neighbors and friends how well you are doing. It’s great when you’re making the big profits, but keeping up appearances is often the downfall of even the most astute trader. Again, denying your need for fame and glory, or pretending that you can maintain an unrealistic reputation, will use up your psychological energy and interfere with your ability to concentrate. Huge profits tend to go to the humble, so try not to build up your reputation. Admit that you will have difficulty keeping up appearances and just quit doing it.

One fact that traders wrestle with continuously is the notion that, “Trading is not a legitimate job.” Many traders struggle with the legitimacy of trading. Some traders find that they can simply remind themselves, “Trading provides liquidity and helps control prices.” Other traders, however, think this isn’t good enough and need to find more meaning in their daily trading activities. For example, they may focus on how trading helps them provide for their family, or may plan to donate some of their profits to charities they view as personally valuable. The point is, don’t deny the possible truth to such ideas. You will be better off acknowledging and working through them, and then just moving on. Denying they exist, on the other hand, will use up time and energy.

Unacceptable beliefs tend to lie in the back of your mind. They remain there, lurking, and when you are vulnerable, they can powerfully influence your outlook. So acknowledge unacceptable ideas, and once you admit the possible validity of such ideas, you will neutralize their potential influence. This will free up limited psychological resources, allowing you to focus all your energy on trading profitably and consistently.

Joe Ross, trader, author, trading educator is one of the most eclectic traders in the business. His 48+ years include position trading of shares, and futures. He daytrades stock indices, currencies, and forex. He trades futures spreads and options on futures, and has written books about it all – 12 to be exact. Joe is the discoverer of The Law of Chartsâ„¢, and is famous for the Ross hookâ„¢ and the Traders Trick Entryâ„¢.

http://www.tradingeducators.com/

Spock the Trader

Do you remember Spock from the television series Star Trek? I do. I remember him because he was always so calm and collected. This guy never seemed to get frazzled. Nothing bothered him. You could cut out his heart and he would say something like, “That is no logical,” whereas most of us would say, “Stop cutting out my heart.”

After all, this was the guy who said:

“Emotions are alien to me. I’m a scientist.”
–Spock, “This Side of Paradise”, stardate 3417.3

Of course, Spock would make a great trader, would he not? He would be able to take a 500 standard lot trade and sit back and calmly evaluate his options, and have a slice of Targ or Bark or whatever it was that Vulcans ate.

It seems that there is a myth that has been heavily promoted throughout the world of trading – the myth that successful traders lack emotion.

This is a load of crap. Emotions are central to successful trading. Spock will show us why.

Lesson #1:Use Your Fear

Everyone is afraid of something. If you think that you are not afraid of anything, then bully for you. You are dead. Hope you enjoy the afterlife.

For the rest of us humans, there are fears. And traders have some of the most rational fears in the entire world. Most traders, after a significant losing trade, become fearful of putting on more trades. We start to wonder how long it will be before we lose our entire account. We do some math in our head and we realize that if we keep losing, we’re going to have to get a job, or dip back into more savings. This kind of fear is not productive.

But the truth of the matter is that we cannot avoid it. We can’t get rid of the fear entirely.

You can overcome – or deal with – this fear by preparing better.

— Spock, “Space Seed”, stardate 3141.9

How much time are you spending on your preparation every day? Are you waking up, switching on the computer, and taking trades?

Don’t do that anymore! You need to wake up and instead of going straight to the computer, try some of the following things to help you get into the right frame of mind:

1. Meditate or pray.
2. Read your trading plan (you do have one, right?)
3. Call your mother?
4. Eat a piece of fruit
5. Read a chapter from a book on trading
6. Sit and quietly think about a trade that went very well, something recent, and picture in your mind doing that again.

When you have done that, make sure that you spend time getting familiar with where the market is. Are trades that you planned the night before ready to execute? What if the trades have opened already?

Consider following only one currency pair, especially early on in your career as a trader. If you work full time this is even more important. You can’t follow 5 pairs every day. You don’t need to and it’s not productive. When you focus on one currency pair, and you learn everything there is to know about that pair, you reduce the anxiety associated with trading.

Most of us are frightened by what we don’t understand (trading is full of surprises, too). You can reduce your fear substantially by becoming so familiar with a currency pair that you understand how it moves, when it moves, what economic reports move it most, what moving averages work with it best, and so on.

Don’t skimp on the time that you give yourself to get familiar with a currency pair.

Consider the following situation: you wake up to an alarm that goes off when a trade you planned the night before is trigged. What do you do? Generally, you rush to the computer and you start trading.

But let’s slow things down a bit. Even if the trades you have prepared the night before have already opened, please take just 30 seconds and prepare yourself mentally. Sit quietly for a moment. Take a deep breath. Picture in your mind how you will react to seeing a profitable trade, or a losing trade. Imagine yourself handling the trade with poise and confidence, just like Spock would expect you to do.

Lesson #2: Channel Your Anger

Have you ever been angry after a trading mistake? That’s good. We can use that to your advantage.

“Where there’s no emotion, there’s no motivefor violence.”
–Spock, “Dagger of the Mind”, stardate 2715.1

What, no violence? Trading gives us plenty of motives for violence!

Please get angry when you make a stupid mistake. If you violate your trading rules, get angry. Get angry if you plan to get out with 25 pips of profit and then, for whatever reason, you let the trade go (thinking you can get more) and you then lose 25 instead of making 25. That is not excusable.

Even get angry at a loss. Yes, that’s right – go ahead and get as angry as you want. Stomp around. Yell some. Grit your teeth. You should not be happy about losses, and there is no point to saying, “Oh, well, losing is part of the game, and I need to lose in order to learn. In fact, when I lose, I learn a lot.”

Bull crap.

Go ahead and get angry. But here’s the key: Channel that anger into applying yourself more aggressively to learning how to trade. Ask yourself how you can do better. Write down what you did right in the trade, and what you did wrong. Talk to your trading partner, coach, team member, or dog. Discuss what you need to do to improve NOW.

Losers excuse their losses as learning opportunities. It’s okay to say that you learned from your mistakes. But losers keep making mistakes and then saying that they are learning. That is stupid.

Make better trades. Learn from your profitable trades.

Stop excusing yourself when you do something stupid in a trade.

Take responsibility.

The problem for traders is not that they have emotions (that would be an unsolvable problem). The problem is that most traders succumb to high emotion, and then they toss their trading plan into the toilet and start making terrible trades. You have to use your emotions to boost your dedication to creating and following a profitable trading plan.

Lesson #3: Don’t Trade Alone

You should trade with a team. Trading with a team – whether it’s one person or 5, can help you.

“No one can guarantee the actions of another.”
– Spock, “Day of the Dove”, stardate unknown

That’s another worthless quote from Spock. What the hell is he talking about? I think that trading in a team can help you make sure that you use your emotions properly. When I trade in a team, the others keep me grounded and as stable as possible. I get angry, and they help me channel my anger.

I get cautious after a loss, and they help me plan my way through that emotion.

When you trade as a team, or plan trades as a team, you are accountable to live up to what you promised. If you say you are going to exit at 25 pips, and you don’t, then you have to face the team. If you say you are done trading for the day, and you take more trades, then you are going to have to explain yourself to the team.

As part of my 1 on 1 training, I set forex traders up into teams – and they find that they are able to focus less on the emotions of trading and more on making good trades. In fact, working with a team has enabled some traders to completely avoid some of their biggest emotional weaknesses.

Lesson #4: Greed Kills

– Spock, “Bad Spike”, stardate unknown

Greed will tempt you to make a deadly mistake:

Overtrade

Many traders keep trading because they are addicted. Many keep trading because they want to get revenge on the market. The only good reason to keep trading is because you see that there is an opportunity to make more money. Never trade because you are in the mood to trade.

If you want to have a good time and don’t care about your money, just light your Euros or Pounds or Yen on fire and have a weenie (hot dog) roast. That is much more fun, you can invite friends over, and at the end of the day you will have more to show for it. And you might even save some money.

How do you know the difference between taking lots of good trades and overtrading? In other words, how do you know when you are on a roll vs. getting yourself set up for disaster? Or how do you know when a winning trade is coming soon even after a few losses?

I ask myself a few simple questions:

1. Am I following my tested trading plan? If not, how can I have a reasonable expectation of success? Unless I am testing a new system on a demo account, why would I trade outside of my plan?

2. How many trades have I taken today? If it’s more than I usually take, then why do I need to take another one?

3. What’s the expected gain or loss from this next trade?

The most important questions there are in #1. Let the market tell you to trade. If your trading system is tested, and the market shows a trade signal, then take the trade. Period. If you are considering a trade outside your plan, then stop yourself and get away from the computer.

Consider also the number of trades you’re taking. Many traders start overtrading and never stop to realize it. Stop every morning or evening while you’re trading and simple add up the number of trades you took – is it way above average? That is probably not a good sign.

(Spock, shown below checking on a long GBPUSD trade)

Lesson #5: Become an Observer

“Who the hell made these glasses? I can’t see a thing in them. This sucks. Does paypal do refunds?”
–Spock, “Bad Ebay Purchase”, stardate unknown

Learn to watch the market without trading. Learn to observe yourself, or at least learn about your own feelings about the market.

First, the market. Watch the market without trading. Get used to following the movement of a currency pair – one currency pair – every day. You will be able to trade a pair more successfully if you know more about it. You will be less anxious about your trades if you are really familiar with what the market has been doing over a longer period of time.

Many traders don’t have enough patience to do this. They want to trade NOW, TODAY, and they have to go to work in 10 minutes. While it’s certainly possible to know enough about the market to trade 10 minutes before you walk out of your house … it’s not recommended. You need to give yourself time each day to get familiar with the past, present, and possible futures that a currency pair has.

Consider the following, especially if you are a beginner. Some of this is review, but it’s important stuff:

1. Never trade live until you have traded on a demo account for at least 2-3 months. Hopefully longer.

3. Consider only following one or two pairs at the most if you trade alone. If you trade in a group, imagine how much you can learn and know about 1 currency pair if it is your main focus.

Next, think about how you can learn more about yourself. Most traders are not going to spend a lot of time thinking about their own emotions. By reading this article, you have taken a step to at least try to learn about yourself and use your emotions to help you trade more successfully. That’s an excellent first step.

But you’re not done yet. For as long as I’ve been trading, I still sit quietly every day before I trade or plan my trades, and I make sure that my mind is as peaceful as possible before I start to risk my money.

Here is an emotional quiz you can take now and as often as possible:

1. Do you trade right after sitting down at your computer?

6. Think of your last excellent trade. What was it like? Why was it successful? What do you have to do in order to set up another trade like that?

You might think it’s weird for me to talk about what you eat or what your relationships are like. The fact of the matter is that if you want to be the best at any career – you need to control your emotions and make sure that you are setting yourself up for success.
Do you want to be the best you can be at trading? Then take an inventory of how you handle your emotions. And do everything you can to use your emotions to your advantage.

One thing that I try to do is to often take the quiz above, or answer a set of questions like it. You can do the same. You don’t have to do it at the same time every day. But here’s a possible strategy for you:

At a different time each day, stop yourself while trading and answer a few questions about your emotions.

If you don’t like the list above, here’s another version:

Here is another way of saying all of this: you can either view yourself as the problem (not good), or you can view your problems as opportunities to improve yourself (good). If your emotions are impeding your trading success, it’s easy to criticize yourself and think and act as if you are the problem. But that’s not the case! You have a problem. You are not the actual problem.

You have control over how you feel. And if you seem to lose control over your feelings, you have the power to do something about it. Make that decision.

When you take a step back and view yourself and your habits, and your challenges, and then you seek to find and implement solutions to your challenges, then you are going to be more successful.

Rob Booker was a child prodigy who grew up to become one of the pre-eminent scientific minds on the planet. The most significant project of his career was the development of a spacecraft for an interstellar exploration program.

Unfortunately, Rob had made a serious miscalculation in the amount of shielding his spacecraft would require travel through Earth’s Van Allen Belt and beyond. As a result of an unexpected solar flare, he was exposed to an unusually high bombardment of cosmic rays.

Having to abort the mission and return to earth, Rob found that his physiology had been mutagenically altered by the cosmic rays, endowing each with incredible powers.

I trade for a living. There is no better way to make a living. Trading is what I love.

I also train others to trade for a living. I have worked with traders on nearly every continent, in nearly every country that we learn about in school.

At my Web site (http://www.robbooker.com) there is a lot of free stuff for traders. If there’s any way that I can help you, from training, to building a system, to just answering questions, let me know. I answer every email I receive. It might take me a few days, but I really try. As much of what I can offer, I offer for free. Some of my services cost money. I hope to hear from you.

The System Behind The System
by Merlin Jeffries, February 2006

When I was a novice system developer I would get excited by every marble-smooth equity curve I stumbled upon. Incredible backtest result in hand, I would start trading my systems with real money, only to find they were big loser in real-time. What happened?

What happened is that the systems I was finding, while excellent at predicting the past, were deficient when it came to predicting the future. This variety of trading system was almost impossible for me to distinguish from the future-predicting kind; until, that is, I started religiously following a process for developing my systems.

The Means Justify the End

In the world of system development the means justify the end. One can not judge a trading system based upon a backtest result (the end); one must instead consider how the backtest result was achieved (the means). The means, or the system behind the system, is a strategically designed process for developing trading systems, and it’s a trader’s main defense against being fooled into putting real money behind a hindsight based system.

The System Behind the System

Here I will present my system, or process, for developing mechanical trading systems. Hopefully it will give the reader a few ideas for developing their own.

First comes the often undervalued administration work. For each system, I create a “project” to organize my efforts. The project gets a name and identification tag. This comes in handy when I want to look back on my past research.

For each project, I move through the same seven steps:

Step 1 – Conceptualize

The first step is to write down the concept and initial rules for the system. For example, if I am researching a simple breakout system, I may write:

concept:
A break of the 20-day high or low signifies the start of a trend.

rules:
ENTRY LONG: buy when price breaks the highest high of 20 days
ENTRY SHORT: sell when price breaks the lowest low of 20 days
EXIT 1: stoploss
EXIT 2: profit target
EXIT 3: max hold period

Next I will identify my system’s degrees of freedom (DOFs). This will come in handy later. In this example, there are three DOFs to declare:

DOFs:
1. stoploss size
2. profit target size
3. max hold period days

I could also consider the “20 day” breakout point to be a DOF. However, in this example I will assume that 20 days is “hard coded” and can not be changed during the project. If I may want to optimize or change any certain aspect of the system over the life of the project, I will declare it as a DOF.

Step 2 – Gather Data

Here I gather the market data that will be used to code and test the system. Following the example, I may decide that my total data pool will include the following:

EURUSD / 05.1998 – 08.2005
USDJPY / 07.1999 – 08.2005
EURGBP / 05.1998 – 08.2005
AUSUSD / 05.2000 – 08.2005

I like to divide my total data pool into four categories:

1. Build Data
This is the data I will use to program/code the system. I don’t need much data for this, just enough to ensure that my code is executing trades as designed.

2. Test Data
I use this data to find my system’s most robust DOFs through chart study and optimization.

3. Walkforward Data
This data will be used to determine if my system can predict the future.

4. Unseen Data
This data offers one final, “honest” test of the system’s ability to predict the future.

How a trader divides their data is more art than science. General guidelines I use are 5% Build Data, 40% Test Data, 40% Walkforward Data, and 15% Unseen Data. I also like to spread a specific symbol (i.e. EURUSD) among at least three data categories.

Step 3 – Code
(data used: Build Data)

Next I write the programming code for the system, and I use the Build Data to check that the code is executing trades as intend.

More times than I’d like to admit there was a flaw in my early code that squandered my entire project. I’ve learned it’s better to take an hour closely inspecting trades than to waste two days researching and testing the wrong system.

Step 4 – Refine
(data used: Test Data)

Using the Test Data, I optimize my DOFs until I find a set that show desirable results. I don’t worry much about the system becoming over-optimized, because if that happens it will not survive the next three steps.

Some software applications, like TradeStation, allow traders to run automated optimizations for the DOFs. I like to lightly use this feature to get a feel for the range of DOFs that will be profitable. If I try 50 variables for each of my DOFs, and 40 yield positive results, this is a good sign that the system is robust. Traders may want to instead manually plug in variables for the DOFs until they stumble across a set that seems to work. I like to take this approach as well.

The main purpose of this step is to study the system on the Test Data and choose the set of DOFs that are the most robust. Continuing the example, suppose I choose the following set of variables:

DOFs:
1. stoploss size – 30 ticks
2. profit target size – 40 ticks
3. max hold days – 22 days

Step 5 – Test
(data used: Test Data)

This step is simple. Using the DOFs from Step 4, I run a backtest on the Test Data, then save the backtest report for reference. I then carefully study the backtest report to determine if results are good enough to be traded in real-time:

> If I would not be willing to trade the system, I loop back to Step 4 to re-refine the system.

> If I am sure I would trade the system in real-time, based on the backtest results, then it’s on to the next step.

Step 6 – Walkforward
(data used: Walkforward Data)

This is where I find out if the system has promise. Without changing the DOFs used in Step 5, I run a backtest on the Walkforward Data:

> If the resulting backtest result is not profitable, or does not have tradable attributes, I will loop back to Step 4 and come up with another set of DOFs (re-refine).

> If the resulting backtest looks tradable, I cross my fingers and move to the final step.

Step 7 – Unseen Data
(data used: Unseen Data)

The final step is to backtest the system on the Unseen Data. I like to call this step “the moment of truth” because it’s quick yet awfully significant.

> If the backtest result is negative the project is over. All the data has been spoiled and any further efforts will be tainted with hindsight. When I reach this point I usually let out a sigh and mumble something about how the life of a quant isn’t all it’s cracked up to be. Unfortunately this is the way most of my projects end.

> If the backtest result is positive, a group of angels fly in my office and circle my monitor singing “hallelujah!” By passing this step, there is a good chance that the system has the ability to predict the future, and it will most likely end up in my portfolio.

The Importance of Unseen Data

“Unseen” data is nothing more than a second set of Walkforward Data. I added this aspect to my process after becoming frustrated with the notion of having only “one shot” at getting the DOFs on the Walkforward Data right before having to abandon the system.

The Unseen Data gives considerable flexibility to my process. I’m able to refine, test, and walk the system forward a number of times without contaminating all of my data. I am always left with one final “honest” test of the system.

It’s worth noting that many of my projects never reach Step 7. It’s perfectly normal to loop through Step 4-6 without ever having a tradable result on the Walkforward Data. After five loops through Step 4-6, the Walkforward Data can become extremely contaminated with hindsight, so much so that I can no longer trust the result obtained from the data. When I reach this point I will usually end the project, never officially making it to Step 7 (although I may still run the system on the Unseen Data for kicks).

It’s a Hardnock Life

The hard-to-endure truth is that I may do 30 projects and never find a good result on the Unseen Data. But this only gives me confidence in my process. After all, finding a robust system is truly a rare event for even the smartest system developers; I would have to question any process that allowed me to trade every system I code.

The key to a great development process is that it keeps hindsight out of the final judgment call of whether or not to trade the system in real-time. The better the trader’s process, the more failures the trader will endure. This is just one more tragic condition the trader’s must burden. The brighter side of having a good development process is that the trader knows that when they go to trade a system they have a good chance of making money, and that should trump everything.

FF;_______________

About the Author:

Merlin Jeffries is a professional trader and a moderator at Forex Factory. He can be contacted at support@forexfactory.com.

Maintain Your Mindset: Using the Three R’s & Positive Thinking
by Linda Bradford Raschke, March 2006

I have been a professional trader for 23 years and am quite sure that my experiences in this business parallel those of many, if not most professional traders. I experience both successes and failures and periods of both satisfaction and frustration. Like others, I have had to stretch and grow as markets and products have changed over the years. The markets continually cause me to reaffirm my values and reflect on my own self-identity, and even after all these years, I keep vigil against fear and doubt. Thankfully, I am blessed with the knowledge of how powerful a tool positive thinking can be and with the ability to implement this tool on a daily basis.

When the markets are closed, I divide my time equally between preparation for the next day, market research and working on my own mindset. Part of this includes reading a paragraph from a motivational book each night, by studying sports psychology or working on the physical elements, such as exercise, nutrition and diet that support my ability to concentrate and focus during the day.

I wish I could say there was a point where I felt like I had “arrived.” More often than not, however, I feel as though I am not even close to reaching that point. I have come to accept the fact that this business is nothing more then a continual process to be taken one day at a time like so many other endeavors in life. For me, the term “trader” has become synonymous with “lifestyle.”

I have learned that everything I do with my lifestyle to support the “trader” function equally supports a separate self. Much of it has to do with eliminating stress, anxiety and burnout. I have experienced all three of these many times in my career, and each time it affects my trading performance. My more stressful life experiences are not so different from many people’s…death, divorce and taxes. I juggle many balls at once. I trade, run a business, have a responsibility for ten employees and am a single mom. I shoulder responsibilities as head of my household, and I maintain a large property. In addition, I strive to excel at outside interests and hobbies.

I wish I could say that I was an extremely efficient person, but I am not. I dilly-dally and procrastinate with the best of them. However, I have become a master at beating stress and anxiety and dealing with the mental side of trading. I figure that if I can take care of this one particular area, the numbers will take care of themselves. This has worked for me each year and kept me in the game.

So, allow me to share some of my personal experiences, routines and rituals for handling some of the more challenging psychological aspects of trading. Sometimes traders can feel alone in their experiences – particularly when stupid errors and large losses occur and during long, flat periods. Believe me, I have made every mistake in the book, have suffered through many sleepless nights and have had conversations with the higher powers that be. Through it all, I have never wanted to leave the trading business. I don’t love trading and I don’t hate it; it is just what I do. I love working.

Some people are lucky in knowing their game right away, and I am one of those people. I know the style of trading with which I feel comfortable. I will never be a long-term trend-follower and will never be one of those who will easily interpret fundamentals or long-term major trend changes on a macro level. I would never feel comfortable running a strictly mechanical system. And I do not want to trade in a way that depends totally on my reflexes. Remember that a trader can’t begin to improve his game until he defines exactly which game he is playing. At this stage in my career, I know my abilities, my strengths and weaknesses. I try and exploit my strengths instead of becoming something I am not nor ever will be. This is what you should be trying to develop as well. Know thyself.

OK, knowing my game is helpful, but just because I know my game does not mean that I will be successful at it. There are numerous steps that must be taken outside of market hours in order to do well during the trading day. I can go through the motions of preparation, organization and outside research. But, I still do not think these are the things that guarantee success. The great equalizer for me is that I believe I will succeed. I have brainwashed myself on a daily basis into believing I will succeed, especially during periods when inevitable doubts have crept in. A positive mental attitude is a form of religion to me.

If a trader has a positive attitude, it allows him to believe that by focusing on the process – the results will take care of themselves. This involves an element of trust. Sometimes it is like diving off a high dive and knowing that if we follow correct form, we will hit the water just right and have a beautifully executed dive. What some people find hard to accept is that occasionally our form will be off, and it is going to hurt when hitting the water. If doubt or negative thoughts creep into my mind when I dive off that platform, I am doomed. I have so many tricks for eliminating the negative self-talk that the positive thinking has become purely habit.

Self-talk is the way that we speak to ourselves, and sometimes negative thoughts are very subtle. For example, if a trader says to him or herself, “I have to do well” or “I need to make X amount of dollars this month,” this type of thinking automatically creates stress and anxiety. Anxiety causes emotional decision making during the trading day. Emotions invariably lead to losing trades.

Eliminating negative thoughts is a process. First, become aware of when you are thinking negatively, and recognize that you can choose to refocus your thinking pattern. Simply rephrasing “I have to do well” into “I can do well” is a step in the right direction. The first phrase places demands upon performance, while the second phrase empha-sizes confidence in your abilities.

Second, interrupt mental thoughts by changing your physical state. Clap your hands, snap your fingers or stand up out of your chair.

Third, refocus your thoughts on the process at hand in order to replace worry, doubt or anxiety. “I can trust myself to make the right decisions today.” “I can take advantage of the opportunities as they unfold throughout the trading week.”

These processes seem simple enough, maybe even intuitive, yet they are probably not as intuitive as one might believe. Positive thinking is something that takes practice.

I cannot emphasize strongly enough how important the power of positive thinking has been in my own trading career. It has allowed me to take every fiasco that has happened in the market place and convert it into a learning experience. I tell myself that what has happened occurred for a reason; then, I must find a way to convert, just as in a sport. Consider the tennis player who goes on a losing streak during a match and drops six games in a row. Things are looking rather bleak to the spectators. However, the player manages to pull off a winning shot or a killer serve. And sometimes the other player makes an unforced error. Top athletes will seize one small victory and convert that momentum to their favor. This happens in team sports as well, such as football, where a turnover provides a new burst of momentum that carries the formerly losing team to a win.

It is no different in trading. Reframe the negative experiences into positive ones, and find a way to learn from them. For every mistake I make, I tell myself that it is a good thing that it happened now so I could learn from it…instead of when I am trading even larger size in the future. I thank the market for bringing any of my weaknesses to my attention so I can learn and improve. If market conditions change or the environment stops favoring my game, I tell myself that this is a great opportunity to do research and find new techniques. All of my best research has come following a drawdown.

There is a fine line between “working hard” and burnout. I have learned the hard way about setting boundaries and defining my limits. In the past, I chose not to acknowledge that I had any limits, and the result was a major compromise of my immune system. It is better to recognize when it is time to step back a bit, instead of waiting for deteriorating health to take its toll or being faced with a major trading loss. Most traders know when they are making mistakes. But, when a trader is burned out, he or she is not able to react properly to correct mistakes. It is almost as if the subconscious is saying – “This loss is going to get so big that it is going to force you to take a break from the markets.”

Aside from the physical symptoms that can indicate burnout, other signs include increased irritability and anxiety, forgetfulness and inability to concentrate. A trader is more likely to take greater risks when burned out. Procrastination, fatigue, neglecting to do the proper preparation the night before, or basically turning a blind eye towards current position is often the next stage. When someone is burned out, they are likely to increase their consumption of coffee, cola or alcohol. Ultimately, burnout can lead to thoughts of “throwing in the towel” – quitting the business altogether or chronic depression.

The main strategy for avoiding burnout is to lead a healthy and balanced lifestyle. This can include daily exercise, proper nutrition, outside hobbies or activities, periodic vacations or even taking just one day on the weekend to go on a “field trip” and enjoy a change of scenery. Educational strategies include attending workshops or seminars, joining a professional organization, reading trade journals or books on sports psychology or motivational subjects.

Sometimes changes to the work environment – something as simple as rearranging the office – can make a difference. Finally, some type of support system is important – a close friend, fellow trader or counselor in whom you can confide. Each time I have had a particularly challenging period, I feel better after confiding my situation to a friend or fellow trader. After all, we all have similar experiences at one time or another. Losses and errors are part of the game. Talking about them with others helps us put our normal human weaknesses in their proper perspective and allows us to move on.

Let me leave you with the three “R’s” I use as a way of maintaining a mindset and keeping focused: record keeping, rituals and research.

Record keeping is the departure point that carries an endeavor beyond just being a “hobby” to taking the next step towards “professional” status. At the end of each day, I log statistics such as breadth, volume, trin and put/call ratios to name just a few. I have been doing this since the first day I started trading. Once upon a time, I updated charts by hand each night because the charting software we have now did not exist. For the past 15 years, I have logged by hand the closing price of 25 different markets, in addition to momentum readings and a few other notations. If I do not log my numbers at night, I do not trade as well the next day.

During the day, each trade is written down along with the ticket number, times executed and fill prices, along with the name of the executing broker. This is essential for reconciling any outtrades the next day and ultimately can save a great deal of time when an error does occur. I also write down my available trading capital each day along with current open positions.

When using electronic platforms, never take it for granted that the trades will hit up correctly the next day. The platform that I use keeps an accurate log of all trades I make, so I do not actually write these down, but save the log files instead.

Compared with many other businesses, trading and markets can seem a somewhat abstract arena. Activities such as record keeping help me feel more productive and in control of my business.

As much record keeping as I do, I do keep statistics on my trading performance, such as win/loss ratios, average-win and average-loss. I find that this will become a source of anxiety or stress to me. Instead, I monitor my equity curve and how I am doing on a month-to-month basis instead of on a day-to-day basis. Why? Sometimes it’s easy to get too excited about looking at the net profit after a large winning day. Large wins can do just as much to tamper with an even mindset as large losses.

Routines and rituals are excellent tools for eliminating emotions – especially those in the doubt, fear and anxiety category. Though I personally do not have any particularly titillating rituals to share, I find that writing things down is particularly helpful for me. I write out my trading plan for the next day after the close each day. During the trading day, I will jot down swing highs and lows as they are made throughout the day. Years ago when I started out on the trading floor, I watched many of the better traders sketch out point-and-figure charts or swing charts by hand during the trading day.

Physical and mental routines are the key to building both confidence and consistency. I can’t say enough about the importance of this area in my own business. It is not just the ability to concentrate, but also the focus of our concentration. It does no good to concentrate on the wrong things. Much of what I am doing during the day is simple observation. But I have a very specific routine and ritual for what and how I observe things during the day.

First, I concentrate on monitoring just a few relationships. Though I have built up my ability to process a large amount of information, I am still subject to “brain-fry” like everyone else. If I try to do too much or trade too many markets at one time, I am asking for trouble. I have specific times of the day when I note certain relationships. I have a limited universe of stocks that I watch. I have three main patterns that I watch for in the cash commodity markets. So, in this regard, I am a classic tape reader, lying in wait for my particular technical conditions or market cues. This is my market routine; you may have another that suits you better.

Outside of market routines, there are personal life routines. For example, I try to wake up at the same time every morning, take my nutritional supplements and eat the same breakfast. This helps me get into the zone or on autopilot before the markets open. These mental and physical routines help me maintain my concentration and keep my mind from wandering. If they are broken during the day, it’s easy to become vulnerable. I continually guard against outside distractions and hat can be handled at the end of the day has to wait until then.

Still, unforeseen things will always happen during the day to any trader, no matter how dedicated he or she is to keeping the “noise” out. One day, a neighbor decided to transplant some huge fica trees in front of his house. A giant digging machine with a claw that had a radius of ten feet sunk deep into the ground and pulled up all the neighborhood phone lines, including our T1s. It took 24 hours to fix. These things are guaranteed to happen whenever you have your largest positions on, and it happens to each of us.

By the way, at the end of each day, I consider my number logging to be just one more essential ritual to help me forget about any unfavorable events that occurred during the day, whether it’s the fica transplant disruption or an unforeseen family emergency.

Research is an integral part of my business, and as a trader it should be an important part of yours, too. Research is a process that never ends. I strongly believe that if I do my own research, I will always have an edge over someone who does not.

Research is important, even if a trader already has a successful method of trading. Anyone who has been in the markets for a while will attest to the fact that market relationships can and very often do change. Thus, research gives me confidence that there is an edge to my approach to trading. I continuously update my research to keep that confidence level high. Research constantly reminds me that trading is a game of probabilities and averages and shows all of the ways that a signal or pattern can fail.

Please remember, research should never be done to validate a personal bias. This type of research too often draws conclusions based on a limited sample size and will usually break down over time. I place very little value on research results generated on a sample size of less than 200 occurrences.

Each day that I trade, I constantly remind myself of how far I have come. It would be so easy for me to pick apart my own performance each day. Instead, I go out of my way to make note of the areas where I have improved.

Yes, old dogs have to learn new tricks. I look at how my skills in using electronic trading platforms have improved. For so many years, I simply picked up the phone and called down to the pits. The first two years that we started using an electronic platform, I simply could not execute profitably with them. My brain would short circuit with the extra steps required for placing an order. The only way I could trade was to have someone else in my office do the execution while I called out the orders. I felt pretty silly not being able to execute my own orders. I tried a number of different trading platforms before I found one with which I felt comfortable. There was definitely an educational process involved in figuring this out.

Trading is really no different than most sports. I just try to stay in the game mentally. I know that my unforced errors decrease as my market preparation and experience level increases. I convert emotions or frustrations into research or better market preparation. I know my game and work on eliminating more marginal trades. I know that focusing on the process will help the outcome take care of itself. In the end, though – no matter if I work 40 hours a week or 70 hours or 100 – I will not be successful unless I believe in my ability to be successful. The power of positive thinking, teamed with hard work and proven routines, will always win out over doubts, fears, self-imposed pressures and marginal disciplines.

Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.

In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, “The New Market Wizards”, and is well known for her book, “Street Smarts”.

More of her writings can be found on her website (see link above).

Should new Forex traders take Forex trading courses or join a Forex training program? Definitely yes; by now you have probably heard that only 5% of traders achieve consistent profitable results when trading the Forex market. The main reason for this is the lack of education. Don’t get me wrong here, taking a Forex training program or a Forex trading course won’t guarantee profitable results, nothing can, but choosing the right Forex training program or Forex trading course will definitely put the odds in your favor.

Before spending any amount of money on any Forex trading course or Forex training program there are some important aspects you need to take in consideration. There are many training programs available, but not every one of them suits the needs of every trader.

The first thing you should be looking in a Forex training program is the content of the material. Unfortunately, most courses or training programs focus or spend most of the time on basic concepts. Though these basic concepts are important, spending most of the course on them won’t help the trader to make consistent results.

The following subjects are what I consider the most important aspects of trading and every training program or trading course should address:

Forex trading basics.

Review basic concepts such as: margin, type of orders, a little background, bid/ask, rollover, etc. You need to make sure you understand every single concept to perfection.

Main drawbacks of Forex traders.

Being aware of the common mistakes made by Forex traders and knowing how to handle them will prevent new traders from making those mistakes.

Technical and fundamental analysis.

These are the two main approaches adopted by Forex traders. Knowing how to properly apply each concept will definitely put the odds in your favor.

The three pillars of Forex trading. I consider that these three subjects have the most impact on every trader trading account.

Forex trading system development.

Having the right system is a must if you want to have consistent profitable results. Having a system that doesn’t fit you will cause a series of problems that will make your trading account vanish away (second guessing the system, not following your system, etc.)

Money management.

This is considered by many successful traders to be the most important single aspect of trading. Money management helps to increase your profits geometrically and at the same time limit your losses (i.e. a good risk reward ratio of about 2:1 will make you money in a Forex trading system that is right only 38% of the time.)

Trading psychology.

Being aware and knowing hot to handle the psychological barriers that affect every trader decision will put the odds in your favor.

Other important aspects every training program should include are:

Developing habits for success (such as discipline patience, taking responsibility of every action, commitment, etc.,) understanding and taking our trading as a business, risk and trade management.

Another important aspect you should take into consideration when choosing a Forex training program is the mechanics of it, getting to know how the training program works.

A good course will have the following:

A live conference room, where you can apply everything learned under live market conditions.

One-on-one feedback, every trader has different needs and requires special attention. For instance a trader wanting to improve the system and requires individual feedback from the instructor about it.

Online trading course, a course that could be accessible through internet. A plus is a course where you are able to access the course at the convenient time for you, so you don’t have to change your lifestyle.

A forum, where members can talk just about everything related to the Forex market and the Forex training program.

Trading the Forex market is no easy task. It requires a lot of hard work. Making the right decision will definitely put the odds in your favor. Take your time when doing your diligence because it is a big and important step in a trader’s trading career.

Email: info@straightforex.com
Web: http://www.straightforex.com

Take a look at Figure 1 and Figure2. Can you tell the difference?

Figure 1:

Figure 2:

They look identical, don’t they? They should. It’s the same instrument. It’s the same data. It’s the same trading platform. Even still, though, if you have a position on in this market, the two charts could look quite different, depending on whether you are trading a demo account or with your own real money, especially if you are new to trading.

Actually, if you’ve just switched from demo to live trading, you’re probably looking at Figure 3, which is the 5 minute version of the other, hourly, charts.

Figure 3:

Why is this? Because things change when you actually have money at risk. For a lot of new traders, the transition from paper trading to real trading is a traumatic one. The relaxed, confident individual is replaced by someone who is suddenly compelled to watch the market tick-by-tick, someone who hesitates to pull the trigger on trades, someone who second-guesses her/himself, and/or someone who finds her/himself less willing to take on risk..

The limits of demo trading

Let’s face it. Trading on a demo platform is essentially a game. There is no real risk involved. As such it does not replicate real trading, at least from an emotional perspective. Yes, a good demo platform provides the trader with a look at how prices move, how transactions are handled, how profits and losses are derived, and all that important stuff. As such, it is an invaluable resource to someone new to trading as they learn the steps. A demo platform is also a great tool for the design and testing of new strategies.

Paper trading, though, cannot suitably create the same kind of mental scenarios one faces when actual money is on the line, though. This is a hugely important part of trading.

The markets will strip you down. Of that you can absolutely be sure. If you have some flaw in your work ethic, discipline, motivation, or anything else, trading will expose it. Some things may come to light through demo trading, but more than likely they will be overlooked because that kind of trading “doesn’t really matter” so one has no real motivation to address anything of that sort. It is when real money is on the line that the cracks in one’s make-up really show. The earlier a trader can figure out what her/his personal weaknesses are, the quicker they can be addressed.

Successful traders are the ones that understand their personal flaws. They either find ways to exploit their strengths while keeping their weaknesses out of play, or make personal adjustments to get rid of those habits which cause them trouble.

Pitfalls of going live

In this modern day, demo trading and real-life trading is mostly very close. In some cases, brokers have identical platforms for both. Other do not, though. That means trade executions could be significantly different, especially during high volatility periods such as when major economic releases are reported. This sort of thing can make a very meaningful difference between how one’s trading goes when demo trading and when it gets shifted to real-world.

From the mental side of things, traders seem to go one of two ways when they first trade with real money. They are fearful, afraid of losing money, or supremely confident, sure that they will succeed. Those with trepidation generally suffer from second-guessing, failure to pull the trigger, and general uncertainty. The confident traders often fly by the seat of their pants, put on trades too big for them, and generally fail to follow their plan.

Interestingly, both types of traders can find themselves following a similar path as they first put their own money at stake. The tendency is to spend too much time in front of the screen – regardless of the actual trading timeframe in question. This is represented by our discussion of Figure 3 earlier. New traders often have their market focus zoomed in to an extreme – living and dying with every change in price. And depending on whether their first trade is a winner or loser, they can flip personality types, with the fearful one becoming confident and the confident one becoming fearful.

This whole period of getting overly focused on short-term price action (relatively speaking) doesn’t just stop at producing manic emotions. It can actually lead to a destructive pattern of over-analysis. One side of that is the hesitant behavior mentioned earlier in regards to fearful traders second-guessing and/or failing to pull the trigger. Call that over-thinking.

The other side of over-analysis is actually that one literally generates new analysis much too frequently. This is a major trap for professional analysts who are expected to always have something new to say. They essentially reanalyze the market with each new price bar. The result is that their analysis never has an opportunity to mature one way or the other. Because of how focused new traders often are on every price move, significant or otherwise, they also struggle with over-analysis in much the same way. It leads to things like flip-flopping positions, not out of fear, but because of a new outlook on the market.

Further, over-analysis has a very dangerous cousin in the form of over-trading. If one is constantly reanalyzing the market, then it is likely that he/she is trading more frequently than perhaps is best. This is a different kind of over-trading from taking on positions which are too large relative to one’s capitalization (a money management discussion for another day), but can be equally as destructive – more so in some ways.

Learning from the jump

So what can a novice trader do to learn the most when making the move to live trading while keeping the “tuition” as low as possible? First and foremost, trading small is imperative. Trade the least amount permissible in terms of size. This will allow for the making of all kinds of mistakes without doing too much harm to one’s financial standing. Education costs money one way or another, but there’s nothing which says one has to pay more than is necessary. In modern trading there are so many options for trading small positions that there is no excuse for the new trader to take oversized losses.

If one starts off trading small, miniscule even, then the focus can really be on what is important – learning about the practical aspects of trading. That includes both the price and execution side of things where it relates to variances between demo and live trading platforms. Even more importantly, it also means learning what kind of psychological impact trading is going to have.

A major learning element of moving to live trading is in the area of risk tolerance. The reality of facing losses in actual money terms forces a great many traders in to reevaluating their personal risk profile. Considering how important this is to one’s trading plan, it is something very significant in the education of a new market participant.

The other big element one must evaluate when shifting from demo to live trading is discipline. This is something which is spoken about over and over and over again as being perhaps the single biggest deciding factor in a trader’s success. It is the ability to stick to one’s plan. Moving in to real money trading tests the novice trader’s discipline in so many ways. Those that go on to have success have good discipline, either in terms of finding a trading style which matches their personality (making discipline easy) or developing a basic grit-your-teeth kind of focus on executing.

If one gets nothing more than a better understanding of her/his personal risk tolerance and the importance of maintaining good discipline, then making the jump to live trading early is more than worth the cost of whatever losses might have be incurred. Anything else is a welcome bonus.

Conclusion

Learning to trade is all about getting to the point of being successful with real money in real market situations. Demo trading definitely has its place, but the introduction of live trading early in one’s development can accelerate the overall rate of learning by showing one exactly what must be addressed for success, mechanically and mentally.

It is hard to ensure a level of success in the process, as one might do in other learning environments. After all, the market doesn’t care whether you have two minutes trading experience or two decades. It will treat you the same. At least, however, one can minimize the potential damage by taking baby steps and trading very small when the initial plunge is made.

What’s more, there is nothing to say that once one jumps in to real money trading that he/she cannot move back over to demo trading. In fact, that can be a great way to develop solid trading methods, ones which can be researched with no monetary risk, but with a clear understanding of how implementation will take place in a live situation. All the more reason to get exposed to live trading as early as possible.

John Forman is the Managing Analyst and Chief Trader for Anduril Analytics, and the author of The Essentials of Trading. He is a near 20-year veteran of the markets. John has traded just about everything, has worked as an analyst in the foreign exchange, fixed income, and energy markets, and has published literally dozens of articles on market analysis and trading methods. He is a contributor to Trading Markets and the former Content Editor for Trade2Win, a trader support web site with over 50,000 members, where he interacted with active traders from across the globe.

Email: author@theessentialsoftrading.com
Web: http://www.andurilonline.com

(transcript from a LBR Online Trading Room class)

Your business plan is your personal blueprint for trading success. It includes not only your goals, but a detailed plan of how you plan to get there. This plan should go far beyond the details of your trading methodology. It should include structuring not only your trading environment, but your whole life. Your mind and psyche are your main trading assets. How do you plan to protect them throughout the year?

Your business plan should be structured to motivate you to make higher highs in your account equity. This sounds like a given, but you must truly fight to come back from each drawdown. You must have allowances in your plan not to give back more than a minimal percentage of profits. Your trading plan must include all the details such as which markets you will trade, which strategies you will follow, and what type of leverage you will use. Only by having a trading plan will you be able to avoid emotional trading decisions.

I am of the belief that it is never too late to start thinking about working on a business plan for the current year. It is also never too early to think about putting together a business plan for next year. This is because it will take you some time to think about the things that I am going to say, and work on your own program.

Trading is abstract and there are so many questions and decisions to be made that come up during the day. Your goal as a trader is to execute your plan and leave the thinking out of it. A daily plan helps to aid in providing ritual, organization and structure.But before you think about how to construct your daily game plan, you need to first put together a broader annual business plan. In setting up your larger business plan, you will be designing a trading program for yourself. Many of the questions our office receives pertain to what type of trading patterns to follow, what time frames to trade on, how to place orders, and which markets to trade. Your business plan should address these issues.

When you setup up your program, you should think of yourself as your own best client. Your account is a client. Your goal should ultimately be to design the type of program you could trade several accounts on, or, think if you wanted to add just one client. You would need a very specific type of program to present to that client, and then, assuming they would be monitoring your trading activity everyday, you would be more conscientious about following your program. Leverage and money management issues would be addressed in this “program”, as would markets traded, drawdowns, types of trades made, etc. I will share with you some of the ways I design my program. Before I do, the business plan includes so much more. It must also include goals and motivational factors, as well as rules, guidelines, and plans to keep you away from trouble areas or spots that you are weakest in.

I find that as a trader caught up in the markets, it is hard to take time off. So it is easy for me to hit the burnout point. I have a tendency to put too many positions on. Taking positions into the last day of the quarter seems to be my achilles heel and bite into my bottom line. So, I am making a very clear provision in my business plan for 2000 NOT to have big positions on going into the last day of the quarter. If you want to give yourself the liberty to take several weeks as you develop your plan to still break a few rules, think about it as you do it. Think which rules are really going to serve you best. This is why I said it might take some time to mull over a few things.

I will give you the essence of my program and then you will see how easy it is to design your goals around your plan. I have separate accounts, one for scalp trades, and one for position trades. Now It is easy to design different goals for each program. For example, if the SPs are the only market you are trading, one goal could be to include a range of expected activity level in making SP scalps. This could comprise your core program or be designated as supplemental activity. By having a goal to make a certain amount of scalp trades a week, you will challenge yourself a bit.

Will you include position trades, index options or GLOBEX activity in your program? Look at you past trading performance. It is easy to break down if you are more profitable sticking to short term scalps, or how much holding longer-term positions really adds to your bottom line. I like to keep my SP scalping activity separate, so for longer-term positions, I like using the NASDAQ futures or SP options as a separate trading vehicle. For trades made in the domestic futures markets, I try to hold trades anywhere from 2 – 8 days. Occasionally I will day-trade the bonds, but I try to play for overnight follow-through in most markets. This was my basic program carried over from my CTA program.

So, I essentially have three separate programs: SP scalping, short term swing positions based off classic chart patterns and 2-period Rate of Change pattern recognition, and long-term positions which can also include stocks, options, mutual funds, etc. You need to think about your mix that will work for you and be CLEARLY organized as to how you are going to manage your money. Each account should have a specific level of funding and number of contracts that can be traded in it.

There should also be leverage guidelines and money management rules for each type of trade. Most of the time I do not use my full line. I trade 1 contract per “x” number dollars in my account. Determine a unit size for yourself. As your account grows, you can add another contract. These things should all be spelled out in your business plan.

As for goals, you can structure those two ways. Some people set a dollar amount goal for their trading activity. I have actually avoided doing this in the past, instead choosing to focus on maintaining a certain amount of activity level. I figured if I just did the best job I could each day, the profits would take care of themselves. Sometimes setting a dollar amount can be discouraging during drawdown periods or encourage you to force trades when nothing is going on. This year, I want to have my biggest trading year ever, so that is my goal.

But for some people, a better goal might be to do “x” number of trades on a regular basis, or try for “x” number of SP points per week. This helps to reach the larger goals. I would like to reach half my goal from my daytrading account and half from my position account. Now the question has come up, sometimes gains are unevenly distributed. If you set a target for yourself to make 3 SP points per day for each contract you trade, than do you quit when you make these three points? It doesn’t quite work that way. When you are hot, you are in synch and should keep trading. If your 3 points come easy to you, than why would you quit on the day? You could very easily have a scratch day the next day…or even a losing day.

But you must have SOME sort of guideline. This will serve as your motivation to make a trade in the first place! You must have some reason to pull the trigger in the first place, because so many times it is too easy to hold back on being aggressive. Set a goal that you can not only reach, but that you can exceed. So again, if you are a newer trader starting out with a small account, perhaps your goal will be to take 8 SP points out per week. How are you going to achieve that? If you have a smaller amount of capital you do not want to trade on a longer time frame. You need to find 1-2 spots a day where you can go in and try for 2 points.

Now you are breaking your goal down into bite size pieces. How much can you risk on each trade? When I make “short skirt” type trades, I automatically risk no more than three points. If you decide that you can’t risk more than 2 points, you are going to have to be very careful on picking your spot. You must be able to see your risk point before you go in. See the market turn and then enter “at the market” or as close to that turn as you can. So, that might be a “program” that you can start out with. Now, what might happen if you start out with your scalping program, is that for a few days, the markets might be dull, choppy, Perhaps you feel like you are behind your goal a bit. But then one day, your 2 point trade turns into a 5 point one…or, you get motivated and make a few more trades and exceed your goal. OK?

Don’t put pressure on yourself to make x-amount everyday, but you must have a guideline for what you would like to achieve on a monthly basis. Then at the end of the month, you ask yourself, how is your performance standing up to your business plan? If it is falling short, what needs to be adjusted? The biggest things that keep a trader from meeting their plan are: getting sloppy a few times, forgetting to place a stop, or getting stubborn on one trade. These are the things I see. One mistake waiting to bite you in the rear.

But guess what…it is possible to make all these mistakes and yet STILL make money. Astonishingly, the markets can be more forgiving than we think. It just takes a bit of persistence. So, each month, set your goal to do a better job than the month before. All you have to do is work on making fewer mistakes.

OK!…on to some more parts of the plan – record keeping and structure. THIS IS AN EQUALLY IMPORTANT PART to your business plan. Here is why. Routines and rituals keep things automatic. Additionally, they help set up the daily Game Plan (which we will get to next). A trader needs to get to the point where picking up the phone is just one more thing he does during the day. At the end of the day, I log all my daily numbers. This might seem a useless endeavor since this data is already listed on my computer and I am merely writing it down on paper. But this ritual brings a certain amount of relief to me because I can shut down making all decisions and do some therapeutic grunt work. I thrive on menial tasks and grunt work because I do not have to think during this time. It is a ritual that wipes my mind clean of all the good and bad that happened during the day.

I also have sheets where I log each trade, and lately I am becoming more diligent about doing my P&L at the end of each day. I used to do this during the eighties but stopped the last few years. Part of my business plan for this year includes becoming even more involved in record keeping. I am monitoring the amount of slippage on each trade and the average holding time for each type of trade. You see, you must make it into as much of a detailed game as possible to draw yourself into the game, increase the intensity.

The object is not to burn yourself out either – wrong idea. You do not have to focus on every tick, but rather the opposite. Keep your monitoring of the markets a Zen type of thing, meaning stay loose and relaxed. Sometimes the best trades will happen out of the corner of your eye. For example, perhaps you have been watching a market for a few days. You have been doing your nightly homework watching a particular setup unfold. Then, when the market starts to act a certain way that confirms your analysis is correct, you should be all over it.

You can’t force the trades, but when you are relaxed you will see them better. The best way to stay relaxed and loose is to be involved in some sort of ritual. Like the tennis player who bounces the ball up and down a few times before he serves, does a dance with his feet and wipes his brow – these are all rituals to keep his serve loose. The same tricks apply with trading. You can doodle and make swing charts on paper during the day, write down periodic readings of the ticks, or note extreme price levels.

I hope you are getting the basic idea so far, because I do not want to elaborate to the point of overkill. But here is one more example. The person I worked for when I first traded on the Philadelphia Exchange had been a physicist. He spent 1 1/2 hours at the exchange before the market opened and would be there for an hour and a half after the close. He was very methodical and organized, writing out tickets and orders in advance. He was quiet and unassuming, and as I found out later, he was also one of the most consistently profitable traders down there. The person who first backed me when I traded in San Francisco taught me to chart the 3/10 oscillator every night using Security Market Research charting service. He also taught me to log the daily trin, tick, breadth figures, etc., in addition to writing out orders for the next day. Both these guys are still trading today.

These are some of the common traits I have noticed among those traders who succeed. They all have daily routines and rituals. You must balance out the abstract conceptualizing process the market requires with some tangible activities.

Your business plan should include making a daily Game Plan for each day’s trading. What type of strategy are you going to use for the next day? Is the market due for a consolidation type day, one that starts to form a small trading range? Or is it poised for a breakout, a potential trend day? Is there an opening play for the morning? For example, if there is an early morning sell off, will it setup a buying opportunity? Or should rallies be shorted? Your game plan could include looking to sell a test of the previous high or buy a pullback to the hourly moving average.

At night, it is easy to note where the hourly grail patterns might be in other markets. Write down imaginary orders…”Buy Silver at such and such a price if it retraces to EMA”. You will be more likely to make the trade if you follow this practice. Perhaps there is a particular market you have been following with a directional bias. Write down the previous day’s high or low and use that as your pivot.

When managing longer-term trades, you will be more likely to stay with them if you write out clear instructions for trailing a stop. Write down your stop level and continue to move it as the market moves in your favor. My favorite way to trail a stop is to use a two-bar channel stop, or to use hourly support and resistance levels. In a downtrend, I will trail it just above the last hourly swing high, but in an uptrend, I will give it more room and trail it beneath the hourly low of two levels ago. Trail your stop not on the last swing low but the one before that one. This is because up-trending markets are more prone to A-B-C type corrections. There is not a perfect way to trail a stop – they all have their flaw. A 2- bar trailing stop works well, on paper, but personally, I hate the give back on any trailing stop and usually look to exit on some sort of buying or selling climax.

Sometimes, trading in another market can be a good diversion to keep you from taking profits too early on a position that is working. You have to let time work FOR you in winning positions.

Game plan – Business plan – overall trading environment structure…just start thinking about the way you really go about things. Get yourself down to a one day at a time type of process. Even if you are a position trader, your job is not to think about too far into the future, it is still to take one day at a time, even if it is just a monitoring process. The tape is always in the here and the now. Your goal should be to do the best job you can that DAY. Follow your rules and your game plan for that day. If the market moves in ways that were not in your game plan, that is OK. The wrong game plan is always better than no game plan at all. At least if your game plan is wrong, you will know it fairly quickly and that in and of itself has forecasting value.

It is OK to miss a million trades, but it is not OK to miss one that setup on your game plan you have been waiting for. You can also adjust your game plan midday. Perhaps you were looking to sell a rally back to the hourly moving average, but the market blasts on through. It is OK to say, “because the market failed at that benchmark, it might mean there is a stronger move in the opposite direction”. Perhaps then it would signal to switch gears and start looking for the first 5-minute grail buy. You get the idea!

Here is a list of some of the types of things you can include in your annual business plan. This will give you something to work on. Start thinking about putting together a professional program, comprised of bite size pieces.

1. What methodology or patterns are you going to trade? It is OK to have a “library” of setups, but most people do best concentrating on a niche or particular technique.

   Learn to do one thing consistently well instead of trying to master too many styles.

2. Which markets are you going to trade? If you trade equities, think about keeping a “stable” of stocks to follow. Don’t get caught up in scanning a database of too many issues that you are not familiar with. It invites unfortunate situations where there may be pending issues or reports in the company that you are unaware of. If you have not had much success trading soybeans or silver in the past, why try to continue to trade them in the future?
3. How much capital are you going to put into your trading accounts? Something I have to add here, stay away from looking at percentage returns when evaluating performance statistics, such as percent return or drawdowns, on your personal account. Concentrate instead on dollar amounts. What is your dollar amount tolerance? My stomach turns at a specific dollar amount drawdown. Percentages vary too much according to how much money you keep in your account. You might have a net worth of 1 mil and keep 100,000 in your trading account and your situation will be entirely different than a person who has 5 mil and keeps 100,000 in trading account. The person with the higher net worth will feel freer to use a different type of leverage. So think in terms of dollar amounts…how much are you willing to draw down to?
4. How do you plan to enter, exit, and manage trades? I like dividing my contract size into two units. Sometimes I go all in and then scale out in halves. Other times I put half on and look to add the other half. Some positions I keep half on as a core and use the other unit as a scalping unit. Whatever style you choose, it should be written down into your plan.
5. What is your plan to manage drawdowns? How will you evaluate when you need to take time off?
6. What are your monthly goals? Are you going to strive to make a certain number of trades each week or perhaps a certain number of SP points? Remember, these are guidelines by which to measure your progress. Some months will be better than other months. The end of the month is a good time to do a periodic review. Most businesses do this on a monthly or quarterly basis.
7. Include a daily routine in your overall business plan. How are you going to evaluate your performance each day? Keep a notebook of the things you do RIGHT. Pat yourself on the back for small moral victories, such as exiting a losing position in a quick fashion. Note the small incremental improvements you make.
8. Create an office environment designed to facilitate performance. Eliminate distractions and outside influences. Reduce glare and get a comfortable chair. Invest in good equipment. Invest in an excellent data feed.
9. Include a provision that will keep you from trading if outside circumstances create an unusual stress, such as health, divorce, or a major move. You might as well just write a check out of your trading account and kiss it goodbye. This is a hard thing to recognize before it is too late. People LOSE money during times of 10 major stresses: death, taxes, divorce, moving, health…you get the point. Trading is a performance-oriented discipline. If you can’t perform well, cancel the show… If a tennis player severely sprains his ankle, he cancels the match. Why do damage to your ratings? Why mar your statistical record with sub-optimal performance?
10. Record Keeping – Rate yourself on your routine and structure and nightly homework. Do you do research or have way of logging results? What type of research is included in your program or plan? My problem is I stack too many projects up on back burner. I need to streamline this area for myself. Or, I get diverted doing research, go off on a tangent late at night and stay up way too late. Then I am not in optimal condition the next day. My business plan includes a bedtime. I promise myself to adhere to it.
11. Rewards! All work, no play makes Jack a dull boy. You must have outside interests or hobbies to get your mind off the markets at the end of the day. You must treat yourself to something you really want. If you spend money on your self you will eliminate subconscious poverty thoughts. I am serious. Treat yourself like a million bucks and you will be worth it soon. Maybe after a good week you treat yourself to a massage, or buy something you really want. I already have something in mind that I will do for myself if I meet my goals next year. It is something that does not cost too much but that I could never justify spending money on because it might seem frivolous. But the money comes from my trading account so nothing is frivolous!
12. LASTLY, What plans do you have to continually improve yourself? See yourself as a top-notch person, health-wise, performance wise, and attitude wise. How do you keep advancing in life? You know the old saying, if you are not going forward, you are going backward. Educational pursuit such as books and study courses are important, but don’t neglect spiritual pursuit, or outside projects…perhaps building your own website, starting your own trading network, writing your own book on all the trails and tribulations of the business, or working with a charity.

All the above subjects are more important to your long-term success in staying in this business than any trading indicators or setups! People do not lose money from entering on bad setups. They lose money from getting sloppy in their trading and sloppy in their habits and life. They allow emotional trades to creep into their program because they have not done their homework and are not prepared. Your business plan is a contract with yourself. It is a contract to treat yourself as your own best client. Surrounding yourself with guidelines, rules, and an overall structure can be the vehicle that brings you freedom from performance anxiety and gives you the confidence that you can take your trading to the next level.

Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.

In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, “The New Market Wizards”, and is well known for her book, “Street Smarts”.

More of her writings can be found on her website (see link above).

There are common threads among those who are successful in life and have reached a level of excellence in their chosen field. Success is defined not by monetary standards, but rather by level of happiness, personal fulfillment, and mastery in their discipline. Mr. Bill has achieved this exalted plateau. He is not a trader, but if you substitute the word “trading” for “trainer”, Mr. Bill’s lessons are the perfect recipe for success in the markets.

Mr. Bill is a personal trainer who has discovered the secrets to health, happiness, and building an awesome physique. Some of his clients are Olympic equestrian riders who have remained loyal to Mr. Bill for many years. And here’s why – his philosophy on the importance of building a good foundation has helped his clients bring home Olympic medals! Mr. Bill is in his late 60’s, has a body like Jack LaLane’s, and a mind like Yoda’s. I am going to listen to someone who says that the first thing he does in the morning is to get out of bed with a smile on his face because that is the proper way to greet the day.

Mr. Bill says a good foundation is the key to everything, whether it is bodybuilding or trading the markets. How can you start on the journey towards reaching a level of competency, let alone mastery, if you don’t start from a base of solid training principles? In any discipline, if shortcuts are taken, the cracks in the foundation will show up later and inevitably hold you back.

Mr. Bill has many words of wisdom to share with us on building a good foundation. To start, there must be a solid methodology used to build a foundation, and this methodology must be followed with CONSISTENCY. For example, when working out, it is important to work the muscle groups in a particular order because blood flows from one group to the next. There is a logical rational for everything, even if results are not seen for a while. A good foundation is built on the basics – core exercises for the major muscle groups. And when applying these basics, proper technique is everything. If you have proper technique in what you do, you will be able to accomplish twice as much in half the time.

This certainly applies to the bottom line in the markets. In your trading, keep a basic core group of patterns or strategies that you trade. They should be built on the elementary principles of price behavior, for this is where there is an edge. Follow your trading program with CONSISTENCY, using proper technique and form when it comes to managing your trades. Proper technique is the equivalent of good habits. Even though a trader may not see immediate results in their P&L from following a methodical approach with good money management, it is the good HABITS that will eventually enable the trader to climb to higher levels by using more leverage. It is the good foundation and habits that give a trader CONFIDENCE that their goals are achievable.

Rituals are the main tools used to achieve consistency. However, rituals are not just a tool, they are a lifestyle! Mr. Bill has rituals for practically everything, starting with how you wake up. Shave first, THEN brush the teeth…the same way every day. Next, one cup of coffee with condensed milk…the one sweet luxury of the day. Mr. Bill has 2 ½ hours of rituals before he starts training his first client at the gym. Check the computer for e-mails, meditate, take morning supplements, (have that cup of coffee) and of course leave plenty of time to get to the gym so as not to feel rushed! In addition to creating a methodical approach to everything, rituals offer the REAL luxury of freeing the mind…from stress, anxieties, and negative thoughts.

Mr. Bill states that record keeping is a critical part of building a good foundation. (Sound familiar for success in the markets?) He keeps track of every exercise, weights, reps, and minutes that go by for each of his clients. He notes every detail, comment or aberration. If a client has a unique problem, he thinks about it at night and lets his mind come up with creative solutions while he sleeps. He is devoted to achieving maximum progress for each of his clients. He is even more meticulous in his personal record keeping, including everything from personal nutrition and exercise to finances.

Think of record keeping as one more type of ritual. It is a tool that will help you to stay focused and gain control over areas that are prone to distractions. It is also the main tool used to monitor performance. Every top athlete keeps detailed records on their physical performance and progress. There is no reason why a trader can’t keep detail records on the more abstract business of trading.

Record keeping monitors your progress in reaching towards your GOALS. If your goals are not written down, Mr. Bill says that they are worthless. Once you write something down, that is the first step towards commitment. Writing down your goals firmly implants them in the subconscious and you are less likely to change them. Have you written down your goals for this year? How about starting out with building and maintaining a solid foundation in your trading program!

Mr. Bill suggests learning how to properly SCHEDULE things into your daily routine. Once it is scheduled in, it is part of your routine and quickly becomes integrated into the rituals. Mr. Bill says that if you do not schedule something, such as a regular trip to the gym, it is too easy to talk yourself out of it or procrastinate. So, learn how to schedule time for your record keeping and preparation time necessary for the next day’s markets. There should be no discussion with yourself when it comes to doing your necessary preparation for the markets each night. You will welcome making rituals part of your routine when you find that it helps you start the trading day feeling totally prepared and in control, ready to go.

Mr. Bill says that if you CONCENTRATE on the specific muscle you are working and give it your whole attention, it helps it grow faster. Concentration, in addition to a consistent methodology, is a key component of a good foundation. Learn to concentrate specifically on the task at hand. When you are putting on a trade or managing a position, give what ever you are doing your full attention at the time. With practice, it gets easier to eliminate distracting thoughts.

Mr. Bill believes that everything starts with positive thinking! He was not always that way. He used to drink heavily and smoke until one day, 20-years ago, he simply quit and said THAT IS IT! He weighed 135 pounds at the time (and he is a tall man!) Now he exudes more energy than people half his age. This man clearly loves his life! He says his biggest secret is positive thinking. He starts his day by saying “No negative thoughts today.” He refuses to entertain one negative thought. If one pops into his mind, he kicks it right out or turns it into something positive. And he claims that there are some days now where not one negative thought pops into his head.

Exercise is one of the easiest areas that you can quickly start to feel good about yourself. As you become more fit, you gain strength and confidence. Everything then branches out from there. You will eat healthier as your body feels better. Supplements or vitamins become part of your daily ritual. Alcohol and sugar are less attractive. And you will find yourself making more time at night to get a good sleep, as your muscles need time to rest in order to grow.

This analogy can be applied to the business of trading. When proper homework and preparation has been done at the end of each day, we are in a stronger position coming in at the beginning of the trading day. The first few successful trades give a taste of the satisfaction gained in running a well thought out program, which in turn increases incentive to continue to eliminate all the distractions and wasted time engaging in frivolous activities. Just as the person who engages in a regular exercise program starts to set higher physical goals for themselves, the person who starts to follow a consistent trading program will also set higher goals, such as one day running a successful money management business or striving for continuous new account highs.

Remember Mr. Bill’s lessons on the importance of a good foundation as the New Year begins: Stick with the basics, follow a methodology, be consistent, use rituals to achieve consistency, concentrate on your form and technique, write down your goals, keep records of your progress, and above all, practice positive thinking!

Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.

In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, “The New Market Wizards”, and is well known for her book, “Street Smarts”.

More of her writings can be found on her website (see link above).

This is a list of classic trading rules that was given to me while on the trading floor in 1984. A senior trader collected these rules from classic trading literature throughout the twentieth century. They obviously withstand the age-old test of time.

I’m sure most everybody knows these truisms in their hearts, but this list is nicely edited and makes a good read.

1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray – jump!
49. Lose your opinion – not your money.
50. Assimilate into your very bones a set of trading rules that works for you.

Linda Bradford Raschke has been a full-time, professional trader since 1981. She began as a floor trader and later started LBR Group, a professional money management firm.

In addition to running successful programs as a CTA, she has been principal trader for several hedge funds and has run commercial hedging programs. Raschke was recognized in Jack Schwager’s book, “The New Market Wizards”, and is well known for her book, “Street Smarts”.

More of her writings can be found on her website (see link above).