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5 secrets to getting the trades you want (and winning them)

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What I want from the markets: a great setup with a tight stop loss and massive potential rewards. That way I can take a small risk with a large position size and an enormous profit.

Suspect you’d like something similar from your trading?

How’s that going for you?

Losing more often than you win?

Tight stop loss levels can be problematic, as can trying to put ‘what we want’ onto market setups.

Let’s take a look at a setup here …

trade setup breaking out of range

We have a relatively tight range, and I want to get a 2:1 reward-to-risk ratio, tucking my stop in at the bottom of that range …

But, when I’ve entered this trade just above the range, my 25-point stop is really now very tight below it.

trade setup breaking out of range with very tight stop loss

If the price were to dip down to this stop level, it would still be considered within that ‘range’. Essentially, I’d be selling in a zone that my set-up tells me is a BUY.

By ‘wanting’ a tight stop loss, I’m getting into a trade setup that just doesn’t make sense.

There’s no way I should be exiting at the bottom of that consolidation range. My stop should be lower, out of reach of short-term spikes down. I should only be exiting the trade if the price behaviour negates that setup.

Almost trades, where a tight stop loss lets you down

It’s a trap many of us fall into again and again. It’s very close to a good trade setup, but by having our stop just a little too tight, we’re exiting exactly where we should be entering.

It comes from applying ‘what we want’ to charts and making ‘what the markets are offering’ fit into our plan.

The reality is that our stop on this setup needs to be lower …

avoid tight stop loss. Move it down here

So, what does that mean for our trade? And our risk-reward profile?

Static VS Dynamic

Let’s consider what levels are moveable, and what levels aren’t …

As we’ve seen, wishful thinking shouldn’t affect where our stop goes. Likewise, how much profit we’d LIKE to make, shouldn’t affect where our profit target is.

wider stop causes target to be pushed out

Unless there’s technical reasons that we can expect the price to move this far, pushing out a target just because we want to maintain our RRR is bad practice.

maintaining disciplined stops and targets

Whatever technical tool you’re using for the positioning of a target – it might be Average True Range, Fibonacci levels – your target should be as solid as your stop level.

So, what we have are two static levels: our stop and our target.

The job of the successful trader is to find a dynamic entry between these levels that makes this trade worth getting into.

In this scenario, we’re waiting for the pullback within the range …

static stops and targets with dynamic entry level for trade for a tight stop loss that works

What we traders often forget is that the most dynamic level on your charts – the one level that we really have control over – is our entry price.

5 secrets to getting the trades you want (and winning them) …

  • 1. Don’t take trades that aren’t ‘worth it’ in terms of risk-to-reward
  • 2. Be patient – a retest of support/resistance is your best friend in getting a tight stop loss with a generous reward.
  • 3. Ask yourself whether the price hitting your stop level would negate the trade setup. If the answer is ‘no’ – your stop is too tight.
  • 4. Never position a stop level based on ‘how much I’m prepared to lose’. Instead rely on technical analysis (like average true range, or support/resistance). If the risk is too great, reduce your position size, or get a better entry.
  • 5. Think of your stops and targets as static, but your entry is dynamic.

Success in the market is about fitting what you want to what’s on offer. If you try to bash heads with the market, you’ll come off the worse. There’s plenty of potential for profit out there – just work with the markets, rather than against them.

The post 5 secrets to getting the trades you want (and winning them) appeared first on Traders Bulletin | Free Trading Systems.


7 warning signs that you’re trading on tilt, and how to recover your balance

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If you’re not familiar with the term, ‘tilt’ comes from the world of gaming – pinball in particular. Mechanical pinball machines would freeze if the machine was lifted at an angle by an overzealous player.

It’s a term that’s been picked up by poker players and gamers in general to describe playing through a state of mental and emotional frustration that clouds judgement.

It’s not hard to see how this crosses over into the world of trading.

Fear, anger, greed, hope, excitement, boredom, frustration … all these things come into play as we face-off the markets. If you think you can strip the emotion out of your trading … well, you’re in denial. The best we can do is recognize these traits in ourselves, and plan to dodge their negative effects on our profitability.

7 warning signs that you’re trading on tilt

  • Have you adjusted the parameters of your trade more than twice?
  • Have you deviated from your trading plan?
  • Do you have a trade open that’s beyond your initial planned risk tolerance?
  • Are trades keeping you awake at night?
  • Is your heart racing? Are you excited by this trade? Do you feel emotionally invested in the outcome of this particular trade rather than your overall performance?
  • Are you obsessing about your results this morning, today, this week? Look at your return over a month, and a year instead.
  • Are you reluctant to record your trades – if you can’t justify trading decisions to yourself, then you shouldn’t be taking them.

What trading on tilt does to your performance

Most of us are all too aware of how emotions can affect our performance. There’s been plenty of research into this …

  • Participants in a ‘bad mood’ perform worse in logical reasoning tests than those in a good or neutral mood.
  • Poker players are more likely to go on to lose the next game if they’ve already had two losers …
  • Jumping straight into the next poker game after a loss has a negative impact on the performance unless they are very experienced players.

And that gets us to the interesting bit … experience enables us to get better at managing these emotions. It’s something we can train ourselves to deal with.

A study of young esports players questioned them on how they respond to tilt when playing. The largest portion (32%) chose to take a break, while a quarter of players applied positive strategies to manage their response – self-regulating, using techniques to calm themselves and focus on the game, learning from what went wrong.

So, what should we do when we feel we’re tilting?

  • The first step when you feel your emotions clouding your judgement is to walk away from the markets to avoid making bad decisions.
  • After a losing trade – force yourself to wait before you get back in. Don’t get back into the market until you’ve had time to process and feel calm – be that 20 minutes or 2 days.
  • Sit on your hands. Fear of missing out can lead us into bad, rushed trading decisions. There are lots of profit opportunities in the markets. What you miss today or this month, will come along again tomorrow or in a few weeks. What’s not in endless supply is your trading fund – protect that, even if it means doing nothing.
  • Myopic loss aversion is something all traders suffer from in some form or another. Look through your long-term track record instead of sweating over today’s results or this week’s. How have you performed this month? This year? It’s by looking at the long-term data that we can find patterns and improvements in our performance.
  • Be self-aware – notice your bad habits and build rules into your trading plan that will overcome these. For example, if you’re moving stops and targets, look for a way to make your trades set-and-forget, so you can walk away from your screen. (Longer term charts can also help with this.) If you’re overtrading, limit the number of trades you can place in a day, or add an extra filter to cut out weaker signals.
  • Note that boredom is on the list of mental states that have a negative effect on our trading. Turning yourself into a trading zombie, with no emotion, isn’t going to motivate you. We need to be engaged and interested in our trading, with a degree of challenge. As with most things, it’s about finding a balance.

And finally, you’re going to make mistakes – both in trading technique and in your mental game. Failing to learn from mistakes is the biggest error of all. Try to be self-aware and honest about your flaws – learning from those mistakes is how we breakthrough and improve.

The post 7 warning signs that you’re trading on tilt, and how to recover your balance appeared first on Traders Bulletin | Free Trading Systems.

Am I boring you?

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Many people (me included) began trading because we didn’t like the nine-to-five grind, or being beholden to a boss. It can be a liberating way to make your own decisions, stretch your brainpower, and gain financial freedom.

But sometimes you can feel like you’re stuck in a rut, and even the dynamic Forex markets seem, well, just a bit boring. Perhaps they aren’t moving much … perhaps there just haven’t been the right opportunities … perhaps you’ve been staring at a screen for hours.

I find it interesting listening to the experiences of other traders, and recognising those thought processes in my own trading. Just two days ago, I was feeling frustrated that the market wasn’t giving me the substantial moves I wanted on my Heikin Ashi Mountain strategy, only to glance at my results and be reminded that an 8% winner had landed in my account just 10 days before. (And I’m currently sitting on an open profit of over 4%.)

Heikin Ashi Mountain Ad button

It got me thinking about my boredom threshold and how easy it is to get distracted from our goals and start feeling apathetic, even in the supposedly nail-biting world of financial markets.

Looking for the drama

Many people see trading as a fun, exciting, gambling-like activity.

A study run at the University of Hong Kong showed that trading volume in Taiwan from individual investors fell by 5 –9 per cent on days when the lottery jackpot exceeded 500 million Taiwan dollars. The conclusion the researchers drew was that many individual investors were as happy to play the lottery as they were to trade, because they were in it for a gambling-like ‘thrill’ rather than as a sensible investment strategy.

Sure, trading can certainly fit the bill as a fun, exciting, lottery-like activity. But if we’re in it for the drama, we’ll get drawn to low-stake, high-reward, lottery-like trades which are very unlikely to win.

Meanwhile, those who are calmly trading markets, with sensible risk-reward profiles, will be ready and very willing to take your money off you.

If your trading is exciting … you’re doing it wrong.

Many activities that are perceived as exciting and adrenalin-fuelled also involve spending a lot of time in pretty dull, repetitive tasks. Flying planes involves running through lengthy safety checklists … skydivers must meticulously pack their parachutes …

And traders should be …

  • watching charts waiting for the action
  • keeping trading journal
  • testing strategy amendments
  • doing nothing because the market conditions aren’t right
  • looking over trading journals for areas that can be improved on
  • making what feels like painfully slow progress in building profits

If you’re not recognizing these elements in your trading, then you’re missing out the most crucial parts to success.

Doing the boring admin stuff is essential if you’re going to grow as a trader. We can’t build on what we can’t measure.

Likewise, doing nothing A LOT of the time is imperative – we need to sit on our hands when the market conditions aren’t right.

And as for slow progress … yes, it would be nice to think that we’ll have a meteoric rise to untold wealth … but even the healthiest profit curve can feel like a slog.

Here’s why …

A couple of years back, I created this chart to help HAV Trading members track their performance. When I saw it there on my screen, I was shocked …

HAV drawdown vs run-up
https://tradersbulletin.co.uk/trading-drawdown/

The brown area shows our growth, but those red areas at the bottom track when we’ve been in drawdown. And those little green areas … the ones you can barely see? Well, those are the periods in which we’d been hitting new highs.

This chart really gets to the heart of what can feel so frustrating about the markets – we spend so much time feeling like we’re not moving forward – because we’re actually moving backwards. The reality is that even the most successful trading strategy spends most of its time in drawdown.

There we have it … not only is trading boring, but it also feels like we’re going nowhere!

So, why do we bother? With all that boredom and frustration, it’s hard to understand how trading is just so popular. But it is.

And not just for the thrill and drama that don’t do us any favours.

Of course, there’s plenty of allure in the profit potential of trading. But even in the day-to-day activity (or lack of it), there’s thrills to be found …

First up, all that ‘doing nothing’ can be well-focused on doing things we enjoy that AREN’T trading! And there’s the financial rewards … the mental workout … the sense of satisfaction from achieving long-term goals … and the security that success can bring.

If that’s boring … I’ll take it.


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Unreliable friends: is it true that the trend is your friend?

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The question I had from a Trader’s Bulletin member this week was about following the trend … we’re told that ‘the trend is our friend’ and that we should look for longer-term trends, and trade in those directions. But what this member was highlighting is that the trend doesn’t start in the daily or weekly chart. It starts on the tick chart and spreads up through the timeframes.

So, should we be thinking bottom up, rather than top-down?

The trend: an unreliable friend

“The trend is your friend” is one of those platitudes from trading that we may not question as often as we should. Because, as all trend traders know, catching a trend is great when you have one, but you need to get used to being wrong, and being wrong often.

Trend trading involves a lot of false starts, jumping into moves that go nowhere, or getting in too late when it’s running out of steam. It means that trend-trading strategies tend to have a low success rate, which needs to be balanced with a high reward-to-risk ratio. So, when we do have a winner – we need to let it run and run.

Heikin Ashi Mountain, for example, has a win rate of just under 40%. That means that we lose 6 out of 10 trades. But my average win size is £389, compared to an average loss size of £193.

So, if trends are so unreliable, why do we turn to them again and again?

The reality is that making money from the markets is a tough game. There are no certainties in determining which way the markets will move, so we must take help where we can get it.

And that’s where long-term trends come in. Take a look at this daily chart …

the trend is your friend: uptrend on the US Tech

No prizes for spotting that this market is trending upwards.

If we were to randomly pick two points on that chart to enter and then exit a trade, that trade would have a greater chance of success if it was a buy trade.

And that’s what following the long-term trend does – it nudges the odds in our favour.

Of course, it’s very possible to buy into an uptrend and lose money. For example, if you bought at A and sold at B; or you bought at C and sold at D …

You can still lose trading with the trend.

But, even with some bad timing, it’s possible to escape with a profit (or limited damage), like an entry at the high of X and an exit at the dip of Y …

easier to make money if you follow the trend

And that’s what long-term trend confirmation gives us:

• a better chance of success, and

• potential for a bigger move

It’s nothing more technical than that. A bit like buying a house in a rising market – even if you misjudge the spend on doing it up, you can still eke out a profit.

But we can do better than just randomly enter markets according to a long-term trend. This is where the beginnings of moves become important …

Zooming in

When entering a trend, we don’t want to risk getting in just as the market is pulling back. That’s how we can lose money, even in the direction of the long-term trend.

What we want is to enter just as we’re coming out of a dip, and exit before the next trough kicks in.

And the way to find good entries is to zoom in to shorter timeframes.

Because it’s in the short-term candles that market moves get started.

Take a look at this longer-term trend on the DAX hourly chart, which presents an opportunity to get in where it’s interacting with the 50-period moving average (circled)

zooming in from a long term trend to find a short term entry on the double bottom

By zooming into a 10-minute chart, we see a double-bottom formation, divergence on the Stochastics, and a fast entry as price breaks through the neckline.

By using two timeframes together, we get fast entries, but with the security that there’s the weight of the market behind them.

Top-down or bottom-up? It’s a time issue

Using multiple timeframes is about how they relate to each other, rather than one being more valuable than the other. Of course, we can look for market moves on a shorter timeframe, and then turn to longer timeframes for confirmation …

For example, we might find what looks like a nice breakout opportunity on a 5-minute chart …

short term breakout signal on 5 minute chart

But zooming out to a daily chart, we seen this …

scale up to long to term to see that youre trading against the trend

But there’s a practical problem with going bottom-up … Time.

By starting at longer timeframes, we can immediately discount a raft of signals and save ourselves hours of screentime.

If we’re only looking for buy signals in an uptrend – that’s immediately crossed the weaker 50% of trades off our list.

Switching up / switching down

My advice is to be adaptable and open to what information timeframes can give us.

Longer timeframes can give us useful information, but make sure it’s relevant to your actual trade. If the daily chart is in a downtrend, and you want to buy on the 5 minute – it’s not necessarily going to impact on your trade (unless you’re in a situation like the one above – where, yes, it does).

But stay flexible in moving between timeframes, you’ll be more aware of market behaviour, ready to respond to price action, and alert to the best of setups.


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Escape the Trading Conveyor Belt

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This week I’m looking to reset the amount of time I spend screen-watching. It’s a habit I get into when I’m making training videos … and it drags me into all kinds of negative trading behaviours.

Yes, I’ve been fiddling with my trades.

I believe there’s something in the nature of trading that messes with our sense of time, as negatively as any doom-scrolling social media app … it makes traders especially vulnerable to FOMO and to all kinds of time-management traps.

Here’s how to dodge these pitfalls …

TIME MANAGEMENT GURUS

My first call in the bid to control my chart-watching, has been to revisit some of the wisdom I picked up from Oliver Burkeman’s book, 4000 Weeks: Time Management for Mortals.

The book came out a few years back, and was heralded as a self-help book for those who hate self-help books. Unlike most ‘efficiency’ gurus, Burkeman doesn’t want us to do more.

The reality check that ‘4000 Weeks’ sets out with is … well, just that … we only get 4,000 Monday mornings … 4,000 Friday nights …. and 4,000 Sunday afternoons ….

It’s a number that doesn’t really faze my kids, but as someone who’s already making a healthy dent into their 3rd K … it never fails to send a shiver of panic down my spine.

The finite nature of time isn’t pushed by Burkeman to spur us into activity though. Instead, it’s to show us that it’s unrealistic to think that we can do it all. We can’t ever get to the bottom of our inboxes, or catch every trading opportunity. It’s unhelpful to think that we can.

NATURE OF TIME

Before hours and minutes were measured, and work was clocked-in-and-out of, people had a different view of time. But in the modern world, time has become a conveyor belt that we cram stuff onto, trying to achieve more and more. Trading actively feeds into this ‘conveyor-belt’ feeling – with blocks of time literally firing at us from the right of our screens when we’re watching charts.

Time becomes something we’re swimming through to get to our goals, rather than something we inhabit.

We clock off those candlestick blocks of time, marking our progress (or sometimes, lack of progress) … and we fall into two big traps:

  • taking bad trades from a dread of missing out, and
  • failing to give attention to what we’re doing

EMBRACE FOMO

When we accept that we can’t catch every candlestick and that we’ll miss many amazing trade set-ups … we can give ourselves a break. If we aren’t trying to get every winning trade opportunity, we can start to think about which ones we actually do want to catch.

There are things to help us catch the best opportunities … and CRUCIALLY, the best opportunities for us …

Which trading periods are best suited to you?

How much time do you really want to devote to this?

Combine those thoughts, with working to add filters that’ll cut out the weaker performing signals, and you’ll find you can trade less, make more, and have more time for the things you love.

Which comes to the next point …

WHAT DO YOU WANT TO PAY ATTENTION TO?

As social media platforms openly compete for it, we recognize our attention as an increasingly valuable resource.

The “attention economy” is working just as hard in the markets – with constant noise drowning out the signals we’re looking for.

You can’t keep on top of all the information the global markets are firing at you, and trying to do that is just loading more stuff onto your ‘conveyor belt’. Instead, consider the things you WILL give your attention to, and accept that you’ll miss information from other sources. By making this a conscious decision, you’ve controlled what you’re doing, rather than just trying to hit every ball thrown at you, and randomly missing some of them.

Burkeman stresses that our lives are the sum of the things we give our attention to. Consider what you want to pay attention to – if you love your time chart-watching, that’s great – fill your boots with watching candlesticks. But if it’s a means to an end, then spend less time doing it – regular once-a-day trading, or once-a-week can be just as profitable, and takes a fraction of your time.

Whatever you chose, always trade in fixed timeslots that you’ve consciously chosen, giving attention in those times, but removing yourself from the markets in other times.

Accept that you’ll miss opportunities – that means that you can focus on the good opportunities, and the ones that are at the times you’re engaged – it’ll make you a better trader, and give you more time to enjoy those Monday mornings, Friday nights, and Sunday afternoons …


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Market noise: how to clean up your act

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Yesterday, as I drew extra lines all over my charts, I reminded myself of what I said just last week … about the limited attention we have, and how we need to focus in on what’s valuable to us, and not get sidetracked by the noise.

It’s easy to fall into the trap of looking for that indicator (or combination of indicators) that’ll be the Holy Grail. And that path can quickly lead to cluttered charts, where obvious signals are easy to miss in the jumble … or indicators contradict each other, leading to confusion.

There are traders out there who’ll swear by a ‘clean charts’ approach, stripped of technical indicators, so they can really see the price action.

Exactly how ‘clean’ you want your charts and how much market noise you want to filter out, is really down to individual perception. Just like some people can work best at a messy desk, while others need order … some people know exactly where the signals are under a jumble of lines and shapes, while others will need a clearer view of the price action.

What we want is to find the right level information in our trading that we can deal with in a useful way, rather than burying ourselves under news and data, unable to find meaningful sense in it. As I said last week, we can’t hope to analyse everything the market throws at us. So how do we find the information and tools that’ll be helpful to us?

FILTERING NEWS AND FUNDAMENTALS

As a technical trader, I don’t rely heavily on news and fundamentals, beyond acknowledging when market-moving events will occur, and whether I want to dodge out of the way of the kind of volatility that could knock me about.

Fortunately, there’s a very simple way to find market news that could affect us: www.forexfactory.com

If you’re not familiar with the site, it lists all market-moving news on a day-by-day basis. You can use the filter to focus in only on the events that’ll affect the market you’re trading, and stick to the high-impact events, marked in red.

HOW MANY TECHNICAL INDICATORS DO YOU ACTUALLY NEED ON YOUR CHARTS?

Again, it really comes down to what level of clutter is your comfort-zone.

Think about the tasks we ask of our indicators, and check you’ve got bases covered:

I’m not saying that you need a technical indicator to deal with each of these things. You absolutely don’t need to crowd your charts with 8 technical indicators. Some may serve multiple tasks, and you may be using price action or fixed parameters for others.

Just make sure you’ve considered these things.

PICKING THE RIGHT INDICATORS

Of course, we want indicators that are technically suited to the tasks we ask of them. If you’re unsure about any of these, please use the links above to find suitable indicators for all the jobs listed.

But there’s another very important factor in selecting indicators that’s often overlooked as we get bogged down in the data.

You’ll be using these tools, probably every day, and relying on how you analyse them to put your money at risk. So they should be user-friendly. Difficult-to-decipher indicators are much more likely to lead to missed or misread signals. We want technical analysis to ADD to our picture of the market, not to distract us from it.

THE 130-YEAR-OLD GERMAN THEORY THAT YOU SHOULD APPLY TO YOUR CHARTS …

Gestalt theory emerged in the late 19th and early 20th century, and is related to perception: how we perceive the whole as more than a sum of its parts.

It’s behind many of popular optical illusions you’ll recognize, from the ‘young woman / old woman’ cartoon, to the recent ‘girl stuck in concrete or behind a wall’ internet meme.

Our brain tries to see one thing, but jumps back and forward between the two opposing images.

Gestalt theory also includes something called ‘reification’ which enables our minds to ‘fill in’ spatial information, even when it isn’t shown. Like the shapes below …

SO, WHAT ON EARTH DOES THIS HAVE TO DO WITH ADDING TECHNICAL INDICATORS TO YOUR CHARTS?

It’s about finding what helps you see, and avoiding what hinders you. Some indicators can share their information at one glance (of course, practise helps), while others need us to scratch our heads before we ‘get’ what they’re trying to tell us.

When you add the former to your chart, it gets clearer. When you add the latter, you risk muddying the waters.

What works for me, may well not work for you, but here are some of my favourites when it comes to intuitive chart tools:

• Bands: Bollinger bands and ATR bands give me a very visual idea of where price will move to, and when price is breaking out of expected zones.

bollinger band bounce

• Moving average ribbons: ironically, sometimes a dozen moving average lines can be less confusing that a single line. Take a look at the image below, where a moving average ribbon feels very dynamic and intuitive in terms of trends picking up steam and fading:

• Do-it-all indicators: indicators that do multiple jobs may look like ‘a lot’ at first glance, but can be very intuitive when you get used to reading them, like Ichimoku clouds or the Elder Impulse indicator, shown below …

Elder Impulse Trade Examples

Although the downside is that this type of indicator can distract us from what’s actually happening in the price action.

THE CURATED TRADER

When the indicators you use are carefully edited and easy to read, you’ll find decision-making faster and clearer.

I’d love to hear about which trading tools you find intuitive and effective. Please share your thoughts below …


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Why your trading method is failing

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Last weekend, an event in Scotland hit headlines around the world …

“Police were called out and children cried” said 9 News, Australia

No, it wasn’t the rugby.

Here’s how USA Today described it: “a sparsely decorated warehouse with a pair of women with green wigs.”

The event was Willy’s Chocolate Experience. Who’s organisers carefully dodged copyright laws with their name. But took less care of the people who paid £35 a ticket.

Here’s the marketing … vs the reality …

Of course, this isn’t the first event to have been over-hyped. Checkout ‘Santa’s Winter Village’ in South Australia from a few years back …

And last month, Barry-1, the controversial Quantum-driven satellite, lost contact with his handlers. This was just before the Quantum Drive could be switched on – a piece of tech widely regarded by the academic community as pseudo-science.  Now Barry is a multi-million-dollar piece of space junk.

EPIC FAILS, AND TRADING STRATEGIES

What does some cotton wool stapled to a cardboard box have to do with our trading?

Well, the reality of trading is a long way from the marketing hype around trading. Whether its Wolf of Wall Street, Tik Tok or SuperBowl ads … it’s made to look like an exciting, easy way to make a lot of money.

With that starting point, it’s very easy for perfectly successful and normal trading to feel like a failure … and many people give up before they’ve given themselves a chance to make any serious wealth.

Let’s look at what trading promises to bring us …

UNLIMITED EARNING POTENTIAL

It’s absolutely true that trading has the potential to bring us financial rewards on an exponential scale. But, I’m afraid, not by next Tuesday …

Can you make 20% profit in your first month? Yes, that’s very possible, if you get lucky. But it’s not possible to maintain returns like that. Realistically, we’re looking to nudge 2-4% gains per month as a long-term average.

If you’re trading with a £10k pot size, that’s not going to have you rolling in cash anytime soon.

You have to build up your trading fund.

Take a quick glance at any compounding chart, showing us exponential growth, and you’ll notice a long, low, flat-looking part at the beginning. That’s the slog.

The reality is that it takes time to hit ‘the second half of the chessboard’, when the profits are growing seriously quickly.

While we’re waiting, bringing in a little bit one month, giving a chunk of that back the next month, it can easily start to feel like we’re failing.

FREEDOM FROM THE DAILY GRIND

Another thing that trading often promises us is a freedom from the 9–5, from having to answer to a boss, and – ultimately – the life of a digital nomad, where you can work wherever and whenever you want.

Whenever I think of the digital nomad lifestyle, I’m reminded of the rather melancholy film, “The Happiest Guy in the World” about Mario Salcedo, who’s spent more than 20 years living on cruise ships. But my own experience of ‘working from anywhere’, generally involves hiding in a dark room because the glare of the sun on my screen means I can’t see my laptop screen, or balancing on the edge of balconies, trying to get data.

Yes, trading can give you huge flexibility, but there’s also work to be done:

  • A learning curve, that never stops
  • Market timings that dictate your working hours
  • The need for consistency and discipline pushing you into a routine

This isn’t a passive income. (Although my HAV Trading system is about as close to passive as you can get!)

TELLING SUCCESS FROM FAILURE

Again and again I speak to people who are disheartened by trading and feel that they’re failing.

It’s just not what they were expecting. And they feel like they’ve been sold a ticket to Willy’s Chocolate Experience only to end up in a warehouse near a sewage plant in the outskirts of Glasgow.

The biggest problem is that profits are slow to come, and inconsistent when they do …

But this isn’t failure. It’s the beginning of that spectacular profit curve I just showed you.

Bill Gates said “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.”


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Bad cable management, XY problems and Alligator solutions

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There was a lot of noise coming from my son’s room. I’m talking about the sound of power tools. He came downstairs a few times, asking where he could find more drill bits, and I pointed him in the right direction, trying not to get involved and micro-manage his project …

Later, I went to investigate.

He’d wanted to do some ‘cable management’ on his desk. The plan was to feed his monitor leads through a hole he was making in the desktop. What he’d really needed was a screwdriver to remove the plug from the end of the cable. But the solution he’d chosen was to drill a series of large fist-sized holes through the desk.

To be fair, he’s the son of a man who’s favourite ‘fix’ is to hit it with a hammer, so I shouldn’t be surprised that he’d be using the wrong tool for the job.

https://sketchplanations.com/the-xy-problem

Of course, the wrong tools can often get jobs done. I’ve used knives to open jars (and have drawer full of broken knives to prove it) … the ‘hit it with a hammer’ solution really does work sometimes … and we’ve all seen the movies where they tunnel out of prison with just a spoon.

And my son DID get the cables through his desk (although the result looks like the work of a beaver).

FINDING SOLUTIONS

Technical support teams, and software developers first started talking about the XY problem – but it crosses over into everyday life in all kinds of places.

And it’s definitely an issue in our trading, where wrong tools frequently get the blame for failed signals. We chop and change our indicators and our indicator settings, trying to find the perfect sweet-spot. But we focus on the wrong solution.

THE PROBLEM: MY SIGNAL IS TOO LATE – if I speed up the settings on it, I’d have got the signal 3 bars sooner, and made a profit

I expect we’ve all done it … looked at that moving average, PSAR, MACD crossover that missed the market move, and wondered if we just changed the settings … our fortunes could be so different.

Signals are either too slow, and by the time they’ve kicked in, that move has passed. Like these too-late buy/sell signals from a moving average crossover.

lagging indicator with moving average crossover

Or they’re too fast, like this Stochastic, which gives jumpy crossover signals every twist and turn of the market price …

The crux of the problem is that we need the right tool for the right job.

BAD TOOLS VS WRONG TOOLS

If you find yourself tweaking the settings on your indicators, there’s a good chance that you’re stuck in an XY loop – fixing a tool that’s just not suitable for the job you’re asking of it.

Take the Alligator indicator as an example. It consists of three lines:

  • The Lips: a green 5-period smoothed moving average, shifted by 3 periods to the right
  • The Teeth: a red 8-period smoothed moving average, shifted by 5 periods to the right
  • The Jaws: a blue 13-period smoothed moving average, shifted by 8 periods to the right

The three lines represent the bite of the alligator against the price levels – first contact comes with the lips, then teeth, then conclusively with the jaw.

  • When the three moving averages are aligned – we have the alligator in feeding mode. This represents the trending phase of the market.
  • When the three moving averages are intertwined, the alligator is in sleeping mode. This tells us that there is no clear trend.

If we wanted to use the Alligator indicator to tell us when a trend is starting, our signals would look a bit like this one at ‘A’ …

By the time our three moving averages are lined up at ‘A’, that part of the move is over and the market is into a consolidation phase.

The first reaction might be that we need to speed up the indicator – shorten the number of periods on the settings, or reduce the lag on it?

But the Alligator indicator is NOT DESIGNED to give us snappy entries (don’t be fooled by the indicator name!) To try to find entries at ‘A’ is misunderstanding what this kind of indicator is designed for.

This is a lagging indicator that’s been actively slowed down!

Where the magic of the Alligator indicator happens is at ‘B’, when the price touches back to the lips.

Lagging indicators like Alligator are all about ‘zones’. They tell you when to starting looking for those entry signals. You’re better off looking elsewhere for your ‘trigger’ or ‘confirmation’ signals.

If you’d like to find more details on my Alligator strategy, that combines this slow-mo lagging indicator with a jittery Stochastic – really focusing on the jobs these tools SHOULD be doing – CLICK HERE.

HOW TO KNOW IF WE’RE USING THE RIGHT TOOLS FOR THE JOB

If something isn’t working, keep digging into what the real issue is. Why do you have those settings? What’s the indicator’s job? If you speed up/slow down the indicator, are you undermining its original task?

Think about the ‘Five Whys’ – a test that originated from Toyota, in its manufacturing process: Ask ‘why’ five times to get to the root of the issue …

Problem: The engine in a newly manufactured car is overheating.
Why is the engine overheating?
The cooling system is not effectively reducing the engine’s temperature.
Why is the cooling system not effectively reducing the engine’s temperature?
The coolant is not circulating properly through the engine.
Why is the coolant not circulating properly?
There is a blockage in the cooling system preventing the flow of coolant.
Why is there a blockage in the cooling system?
The radiator is clogged with debris due to a contamination during the manufacturing process.
Why was the radiator contaminated with debris during the manufacturing process?
The factory cleaning process lacks a proper quality control system to prevent contamination of components.

It’s about digging under the surface at what we need …

Problem: My signals are failing
Why are your signals failing?
My signals are coming after the market move has happened
Why are the signals coming after the market move?
Because I’m not getting a trigger to tell me when the price will start moving in a direction
Why aren’t you getting a trigger to tell you when the price starts moving?
Because I’m using a lagging indictor based on previous price action
Why are you using a lagging indicator to show previous price action?
Because I also want to know the overall market direction in the longer term
Why do you want to know overall market direction?
So I can find the biggest moves when I do enter the market

What we can uncover is that ‘failing’ indicators may well be doing another, extremely important task (or we may find that they’re completely redundant and should be thrown out). Getting the right tools for the job involves having some understanding of what the jobs are that we need our indicators to do.

I’d urge you to look at your indicators under the task types, rather than just ‘trend’ or ‘momentum’ classifications. You need Zone, Trigger & Confirmation tools. And you can find out more here.


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3 Secrets to stop placement

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When a stop level does get hit, it’s easy to think that its due to bad stop placement … if I’d just had it a bit wider … but the reality is that even the smartest stops will get hit. If your stops aren’t getting hit, then they’re probably too wide and not really doing their job.

That said, there are ways to make our stop placement smarter, so our stops are managing our risk but minimizing their chance of getting hit. It involves 3 crucial steps …

  • 1 • Volatility: How long do I expect this trade to run for and what kind of price movement can be reasonably expected within that timeframe?
  • 2 • Support & Resistance: Look both ways – are there any historical support/resistance levels or round numbers that could get in the way?
  • 3 • Risk/Reward: How does this stop distance match up with my target: can the stop distance I’ve chosen give me a good RRR? Likewise, can it give a suitable stake size?

Each of these is vital in smart stop placement. Without these considerations, you’re massively reducing your chance of success.

The first thing to consider in our stop placement is to get a rough idea of what’s a sensible distance to place a stop.

VOLATILITY

If we’re trading an hourly chart, and expecting our trade to be open for a day or two, we wouldn’t use the same stop distance as if we were trading a 5-minute chart and looking to take profits in the next hour.

We should think about what kind of moves are likely to happen between now and when we hope to hit our profit target. Obviously, it would be nice if the price drove a straight line to our target, but that very rarely happens, and retracements are a very normal part of successful trades, so we should be prepared.

Volatility stops are really powerful – they naturally bring stops in tighter when volatility is low, and have wider stops when volatility is high. This allows us to take advantage of momentum when trends are picking up speed. But it also allows us to batten down the hatches in low-volatility periods, like during a consolidation range.

The most basic tool for adding a volatility indicator is the average true range …

The Average True Range indicator gives us average range of movements across previous candlesticks. The default setting is 14, so it’ll look at the average high-low over the last 14 bars and give us an average figure. It’s a good way to assess what kind of moves we can expect to see over the next few bars.

When used as a guide for stop levels, traders will usually take a multiple of this figure to set the stop loss a nice safe distance away. In the example below, the stop is set 3x the ATR above our entry price …

chart showing using Average true range for measure volatility in stop placement

SUPPORT & RESISTANCE

Once you’ve assessed an appropriate distance to position your stop at by considering volatility, the next step is to check whether this level needs tweaking because of support and resistance levels or round numbers.

The accepted wisdom around these key levels is that we want our stop loss level just beyond them, where price will turn before our stop gets hit. But it’s important to remember that levels of S&R are also magnets for price behaviour because so many people put their trade orders around them. That’s why we need to give these key levels some breathing room.

Chart showing how support and resistance can affect stop placement

How much breathing room? Well, that’s the question.

Too tight, and we’re a target for stop hunting. Too wide and we’re taking more risk than we need to. There’s a degree of trial and error here, along with some acceptance that we’ll always be wrong some of the time!

RISK & REWARD

So, you’ve decided a smart stop distance based on the volatility of your market … and you’ve adjusted it a little because you wanted to outside a recent level of resistance. Now it’s time to put your stop level to the final test …

Does the potential reward justify the risk you’re taking on this trade?

• Compare the distance to your stop and the distance to your target. What’s the reward-to-risk ratio? Is that within the parameters of what you’re happy taking?

• Have you moved your stop out so wide that this trade no longer looks like a good opportunity?

• Is the stop so tight (perhaps due to recent lack of volatility) that you’ll be using a much larger stake that you’d expect (this will impact your trading costs and margin requirements).

chart showing how risk reward needs to be considered in stop placement

If any of these things are making your trade look a bit iffy … now is the moment to reject this setup. More opportunities will be along. DON’T be tempted to move your stop again at this point just to suit the kind of setup you’d ‘like’ this to be.

If the market isn’t offering you the setup you need for good placement of your stops and targets, then it’s not a good trade to be taking. Save your money for the best opportunities – that’s how you get a good success rate, along with a sound risk-reward ratio.

Next week I’ll show you some reliable tools for positioning volatility stops.


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The best volatility stop indicators put to the test

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Adding a volatility stop to your trade setups is a really powerful way to keeping your trades in-line with current market behaviour.

Volatility changes, from month to month, day to day, hour to hour, so fixed trading parameters can easily get us into trouble.

A volatility stop means that the leash tightens in when markets aren’t showing much activity, but loosens up when markets are running. And when we use these tools as a trailing stop, we get even more sensitivity to market behaviour while the trade is playing out.

Last week I looked at using the Average True Range indicator to measure volatility, but there are some smarter tools that’ll do the job for you, and I’m going to measure them up against each other …

1. THE AVERAGE TRUE RANGE VOLATILITY STOP

This indicator is our starting point for a volatility measure of an instrument. It gives us average range movements across previous candlesticks. The default setting is 14, so it’ll look at the average high-low over the last 14 bars and give us an average figure. It’s a good way to assess what kind of moves we can expect to see over the next few bars.

When used as a Volatility Stop indicator, traders will usually take a multiple of this figure to set the stop loss a nice safe distance away. This distance will be measured from the close of the previous candlestick …

How to apply Average True Range (ATR) Volatility Stop loss

2. KELTNER CHANNEL

This is a variation on the Average True Range that smooths out bumpy data and provides a more visual approach to where your stop should be positioned.

The Keltner Channel takes an exponential moving average of the ATR, then plots an offset of that either side of a moving average of the price on your chart. You can adjust the lookback period to make that line smoother, and you can adjust the offset for wider or closer stop distances …

How to set up the Keltner channel as a volatility stop

3. BOLLINGER BANDS

Bollinger bands are another smoothed-out volatility measure. They’re measured from a 20period moving average, and plot the average deviation from that moving average over the past 20 periods. The standard multiple for the distance from the central moving average is 2x. As with the Keltner channel, the smoothing out process means that a tighter deviation can work better …

Apply Bollinger Bands for Volatility Stop measure

4. THE CHANDELIER EXIT

The Chandelier stop level is a souped-up version of the ATR stop. It uses a 22-period ATR, multiplies it by 3x, then plots this distance away from a recent high (for a buy trade) or low (for a sell trade).

These are its rules for placement:

  • Stop on a short trade = 22-period lowest low + 3x ATR
  • Stop on a long trade = 22-period highest high – 3x ATR

And it’ll look something like this …

Chandelier Exit set up as a volatility stop on a chart

Adding the Chandelier exit levels to your chart is a little bit fiddly on Trade Nation, but you can do with a combination of ATR bands and Donchian channels, like this …

How to set up the Chandelier Exit on your charts

The Donchian channel sets the high/low for the past 22 period. Then the ATR bands are calculated from this Donchian High/Low to give us our two stop lines, in red and green.

HOW THESE VOLATILITY STOP INDICATORS HOLD UP AGAINST EACH OTHER

Here I’ve applied all four types of volatility exit to a chart, so you can see how differently they behave.

Volatility stops compared on a trade - example 1

For a sell trade entered on the red arrow at 0.6611, you can see where each indicator would have stopped the trade out if used as a trailing stop: Bollinger band, Chandelier exit, ATR exit, and Keltner exit.

Note that trailing stops can only tighten in, never be moved out, so even if the indicator moves up, we’ll only ever move the stop down in a sell trade like this.

The deviation multiples can be changed on these indicators (in my settings, the Keltner and Bollinger bands both have a 2x multiple, while the ATR and Chandelier have a 3x multiple).

Here’s another example, also in a sell trade, but where the trend doesn’t really pick up any speed, so the trailing stops need to be working harder to reduce damage …

Volatility stops compared on a trade - example 2

Note that the bulge on the Bollinger bands when momentum picks up means that, as a trailing stop, it doesn’t really work hard to lock in profits, while the ATR-based indicators do more to trail the price.

I recommend taking a look at these indicators on your charts to see what version of a volatility indicator would suit your trading style.

Look forward to hearing your thoughts.


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