Becoming a Consistent Trader

Transcription

1 presented by Thomas Wood MicroQuant SM Divergence Trading Workshop Day One Becoming a Consistent Trader

2 Risk Disclaimer Trading or investing carries a high level of risk, and is not suitable for all persons. Before deciding to trade or invest you should carefully consider your investment objectives, level of experience, and ability to tolerate risk. This content is subject to change at any time without notice, and is provided for the sole purpose of education and assistance in making independent investment decisions. ValueCharts.com has taken reasonable measures to ensure the accuracy of the information contained herein; however, ValueCharts.com does not guarantee its accuracy and is not liable for any loss or damage which may result directly or indirectly from such content or from an inability to access such information or any delay in or failure of the transmission or the receipt of any instruction or notification in connection therewith. Any past performance results are shown for illustration and example only, are hypothetical and as such have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance is not necessarily indicative of future results.

3 CFTC Rule 4.41 (Hypothetical Disclaimer) U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR- OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.

4 Avoiding Psychological Pitfalls in Trading

5 Psychological Mistakes Many Traders Make Loss Aversion Many traders tend to focus on avoiding losses rather than acquiring gains. This is a problem because it ends up causing you to exit positions early and hurts your reward/risk ratio.

6 Psychological Mistakes Many Traders Make Sunk Cost Effect This happens to a lot of new traders as well as many experienced traders. It is when you treat lost money as more valuable than money you already have. You need to look at losses as the price to play the game. Meaning, do not lost even more money trying to make up for the losses you have already incurred.

7 Psychological Mistakes Many Traders Make Outcome Bias Judging a trade based on its outcome rather than by the quality of the decision at the time it was made. Do not say to yourself That was a great trade I made $300 after the trade is closed. You need to know the quality of the trade you are placing WHEN you place it, not after you know how it turns out.

8 Psychological Mistakes Many Traders Make Bandwagon Believing something just because many others believe the same thing. As a trader, you need to know why you placed a trade and stick to that trade. Do not change it just because someone else says something different.

9 Psychological Mistakes Many Traders Make Making Decisions Based Off One or Two Trades Trading takes a lot of practice. Do not go test a new theory simulated, then go and trade real the very next day because you had 2 winning trades in a row. Understand that trading is about probabilities. You need to have done a sufficient number of tests to actually draw a proper conclusion.

10 Psychological Mistakes Many Traders Make Becoming Emotionally Attached to a Trade Never become emotionally attached to a trade. When you catch yourself making mistakes due to emotions, it is better to stop trading and start fresh.

11 Psychological Mistakes Many Traders Make Not Treating Every Day as a New Day Start every day as if you were trading from zero. Do not hang on to mistakes, learn from them and move on.

12 Questions on Psychological Pitfalls in Trading?

13 What Makes a Successful Trader

14 What Makes a Successful Trader Self-Awareness No body knows your strengths and weaknesses better than yourself. You need to have the ability to realize what those strengths, weaknesses, habits, and biases are, and then capitalize on them. You need to have the ability to realize mistakes you are making, and then make adjustments accordingly.

15 What Makes a Successful Trader Humility As a trader, you need to remain humble. Many traders have their largest losses directly after their largest gains. You need to know that the market is going to kick your butt as soon as you think you cannot lose. Stay humble or the markets will do it for you.

16 What Makes a Successful Trader Being Teachable Great traders are lifelong students. The markets are always changing and evolving, you need to be able to learn and grow with the markets. As soon as you think you know it all, watch out for a drawdown.

17 What Makes a Successful Trader Have a Framework Develop a framework in order to make effective and consistent trading decisions. This is why I am a strong advocate of having a trading plan written out so you can see it every day. Take that trading plan and read it every morning before you start trading, and then follow it.

18 What Makes a Successful Trader Consistency To be a successful trader, you need to have consistency. Your goal as a trader should be to have consistent profits and to avoid large equity swings. Proverbs 13:11 Dishonest money dwindles away, but he who gathers money little by little makes it grow.

19 What Makes a Successful Trader Hard Work One of the most common mistakes I see new traders make is that they believe it is easy money. I do not know any successful traders that have not spent thousands of hours practicing, studying, and working on their trading. Trading is not something you can just start doing one day and make a million dollars the next. (At least not without practice)

20 What Makes a Successful Trader Anticipate As a trader you need to constantly be anticipating the multiple scenarios that can occur. One thing that separates great traders from your average trader is the ability to analyze the highest probability outcome from all the information available on the market. The markets will tell you where they are going to go, the question is just are you going to be able to crack the code?

21 What Makes a Successful Trader Patience I do not know of any successful traders that are not patient. As a trader you need to have the ability to sit and wait for that perfect setup, then jump on it as soon as it becomes available. Do not throw money away just because you want to trade.

22 What Makes a Successful Trader Self-Control Probably the most important characteristic of successful traders is their self-control. As a trader your worst enemy is often times yourself. I always say Trading will make you learn things about yourself you never knew Greed, fear, depression, etc. You need to control your emotions in order to make good decisions.

23 Questions on What Makes a Successful Trader?

24 Creating Consistency in Trading Approach (Putting Together a Trading Plan)

25 Creating a Trading Plan When will I be trading? What time of day do you plan on placing orders and identifying setups? Markets behave differently during different times of day, so if we want to get consistent results, we need to be consistent with the time of day that we are placing trades.

26 Creating a Trading Plan What size account will I be trading? This should also outline the number of contracts/shares/lots you will be placing in each market. We want to keep our gains and losses consistent across all different markets so that we can maintain a good reward to risk ratio. We do not want to be risking $500 in GC then risking $200 in ES because we could have 2 losers in GC and 1 winner in ES and still end up negative.

27 Creating a Trading Plan What are my risk and loss limits? In order to become consistent, we need to make sure we NEVER have a blowup day where we have massive losses. We need to control our daily and weekly and monthly losses so that we can continue trading. We also need to limit the maximum amount we will risk on each trade, there is no Loading the Boat on one perfect trade.

28 Creating a Trading Plan What markets will I be trading? We need to know what markets we will be trading and stick to them. Each market moves differently, so if we want to get consistent results with the strategies we are using, we need to make sure the markets are consistently the same.

29 Creating a Trading Plan What type of trading will I be doing? Am I a swing, day, position trader or am I a scalper? If we want consistent results from the strategies we are using, then we need to be consistently looking for the same trade. That means, we do not cut winners short just because we decide this is a scalp trade Remember, we are removing the variables in our trading in order to make it as consistent as possible.

30 Creating a Trading Plan What strategies will I be trading? This may be the largest section in your trading plan. It should outline every aspect of the trades you are going to be placing: Setup (setups and timeframes) Entry Signal (setups and timeframes) Initial Stop Placement Stop Management (When to Breakeven etc.) Exit Logic

31 Creating a Trading Plan How will I monitor the performance of my trading? How are we going to be monitoring our performance? Daily, Weekly, Monthly? How do we decide if we are doing good or doing bad with our trading? What is a reasonable return we should be expecting? Etc.

32 Creating a Trading Plan If you have trouble following your trading plan, you may want to try writing it out by hand. Studies have shown that we are more likely to actually follow a set of rules if we manually write them out ourselves. Make sure you review your trading plan every day, a good trade is a trade that follows your plan. NOT just a trade that makes money.

33 Questions on Creating a Trade Plan?

34 How to Minimize Drawdowns to Smooth Out Equity Curve

35 Fundamentals of Risk Management Proper stop placement Proper entry selection When to move stop loss to breakeven Understanding contract sizes Understanding event risk Holding positions overnight

36 Fundamentals of Risk Management Proper Stop Placement Place your stop loss far enough away that if it is hit, you know your trade idea was wrong Bruce Kovner from his interview in Market Wizards Stop placement varies depending on strategy you are using to enter the market. Normally I will place stop above or below previous high/low by 2-3 ticks.

37 Fundamentals of Risk Management Proper Stop Placement Stop losses are designed to help your account growth One of the most essential principals of risk management is NEVER enter a trade and not have a stop loss Do not use mental stop losses unless you are 100% sure you have the discipline to stick to your stop level Do not use stop limit orders. ALWAYS use a stop market

38 Fundamentals of Risk Management Proper Entry Selection Many traders believe when you exit is the most important part of your trade. I believe when you enter the trade is the most important part. Entry selection is what determines your risk amount. You should never place a stop at a certain distance just because you don t want to risk the extra $20/contract

39 Fundamentals of Risk Management Proper Entry Selection Proper entry selection is determined by the trading strategy you are using. Almost every strategy we use can have a value filter. This one thing has increase my trading profitability far beyond what I achieved before.

40 Fundamentals of Risk Management Proper Entry Selection One thing that many new traders tend to do is chase the market. This is when you see a big move taking place and your emotions kick in and you say Why am I missing this?! Then jump in with a terrible entry. One of the easiest things you can do to lower your risk make sure you have a good entry into your trades.

41 Fundamentals of Risk Management Using Breakeven Stops Technically speaking, you can get stopped out at breakeven an infinite number of times and never lose money. I move stops to breakeven very soon, if I am stopped out I will reanalyze the trade, and if I still like the setup, get back in. If you have a good entry, the market should never get back to where your breakeven stop will be.

42 Fundamentals of Risk Management Understanding Contract Sizing Many traders do not understand the differences in contract sizing. I.E. You cannot trade silver with the same number of contracts as you do gold. Adjusting your position size according to the contract you are trading is a great way to help manage your risk exposure.

43 Fundamentals of Risk Management Understand Event Risk Make sure you know what events are going to take place every time you start to trade. Additionally, you need to know what markets are going to be affected by the event that is coming up. I.E. Petroleum Status Report is going to cause Crude, RBOB and Heating Oil to move. But normally, it will not affect Natural Gas

44 Fundamentals of Risk Management Holding Positions Overnight Do not make the mistake of holding a position overnight without a stop, or when there is a large amount of event risk that you will not be there during. There is an added level of risk when you hold a position overnight. The markets always have the potential to gap through your stop. I.E. In the trading room we had a Euro short in over the weekend and the market gapped through stop and up 70 ticks for a $5, loss.

45 Fundamentals of Risk Management Volatility Adjusting Trading a different number of contracts per market based on daily volatility Account Percentage Adjusting Adjusting your trade size based on a percentage of total account equity Dollar Risk Adjusting Adjusting position size based on a specific dollar amount you are willing to risk.

46 Questions About Minimizing Drawdowns and Smoothing Out Equity Curve?

47 Using Multi-Timeframe Analysis to Maximize Reward Risk Ratio

48 Using Multi-Timeframe Analysis Multi-Timeframe analysis is, in my opinion, the best way to minimize your per-trade risk and maximize the reward/risk ratio. Essentially, the way multi-timeframe analysis works is by trading a setup on a smaller timeframe, in the direction of a setup on a larger timeframe.

49 Using Multi-Timeframe Analysis The reason this helps to minimize our risk is because of the way the market moves according to the timeframe the setup is triggering on. For example, if you have a 60min chart showing a bear flag, then you drill down to a 2 min chart to find a bear flag within the context of the 60min setup, your risk will be a fraction of what it otherwise would be.

50 Using Multi-Timeframe Analysis Then we can use a target based off the underlying 60min setup. So we have risk from a 2min chart, with a reward from a 60min setup. Remember, the goal is to reduce risk while keeping our profit targets essentially the same.

51 Using Multi-Timeframe Analysis Then we can use a target based off the underlying 60min setup. So we have risk from a 2min chart, with a reward from a 60min setup.

52 Using Multi-Timeframe Analysis Then we can use a target based off the underlying 60min setup. So we have risk from a 2min chart, with a reward from a 60min setup.

53 Using Multi-Timeframe Analysis Then we can use a target based off the underlying 60min setup. So we have risk from a 2min chart, with a reward from a 60min setup.

54 Using Multi-Timeframe Analysis Then we can use a target based off the underlying 60min setup. So we have risk from a 2min chart, with a reward from a 60min setup.

55 Questions About Using Multi- Timeframe Analysis?

56 Using ValueCharts for Profit Taking and Trade Filtering (Live Charts)

57 Questions About Using ValueCharts for Targets and Trade Filters?