TraderNovice.com
I have tried to spend a great deal of time on this website helping new traders understand that most of the necessary characteristics of being a
successful trader are related to unexpected things like self control, discipline, and money management rather than simply being able to predict
market behavior. New traders almost always need to spend less
time on learning market behavior and much more time on money management, learning self control, learning to predefine trades and establish their own rules.
But there comes a time when traders have to learn about the markets and learn about "how to trade" for lack of a better term. This section is about
those aspects of trading.
In this part of the website, I will go over specifically how and when to enter a trade, how much equity to use, how to decide on profit objectives and when to stay in trades or when to get out early. I will explain some intraday trades and some longer term trades. If you have specific trades to share, please contact me via email on the "contact me" page and I may include them.
Hopefully you have a broker, an account that is funded and you have a little market knowledge. How can you put that to use? First you need to develop your strategy, and follow that up with appropriate tactics.
Your strategy is your general plan of how you intend to approach trading. You might, for example, write that your strategy will be to:
Something like that could be your basic outline. You have, in general terms, your ideas for what your general plan of action will be. But now you need to develop some specifics. Those will be your tactics. They may read something like this:
There. Something like that can be your basic Strategy and Tactics. Develop what you wish, but develop something.
So Now you have to think about money management. There ae many different stratedgies for managment, and I cannot go over them all here, but suffice it to say that you come up with an idea on how much money you will use per trade. This needs to be thought out ahead of time. I tend to trade fixed numbers of contracts, but that changes, allowing more, if my stop is close risking less, or fewer contracts if I have to use a larger stop spread. But for the sake of this discussion, we will assume one contract with each trade.
Then, you need an idea. Let's say that you have been watching equities and you think the market will fall, or that you have been watching oil, and you think the price of Oil will rise. Once you have your idea, you then have to look for your trade. For example, if I think that the price of oil will rise (perhaps because of middle east unrest) I do not wish to be short oil. I will then either stay out of the market, or choose a long entry. But I will not be short.
Finally, I need my trade. I will use my specific pre defined tactics to trade based on my ideas. Let's say that I think that equities will fall. I then need to look for a short entry point. One where the stop can be clearly defined, and hopefully one where the profit objective can also be defined.
You come into the day thinking short. Everyone is thinking short (see our section on short covering). See the Chart on the right showing the trading range that had developed and the longer term low and the prior day trading near that low.
You decide that you will go short the Dow, and your product of choice is going to be the Mini Dow Equity index futures..."YM". The overnight is harsh,
and the market is set to open over 100 points lower. The Dow opens down 150, well below the longer term low. You decide to go short right at the open,
using the longer term low as your stop. You think that the bottom could be a long way off, so your profit objective is undecided, but you think
that you will have a trailing stop as the market falls. You sell one contract (pre decided upon and in line with a stop of 60 mini dow points = $300).
(Chart lower left).
Every time you put on a trade.....EVERY TIME.....You must monitor it for continuation. Will it do what you think it will do? If you see something as you monitor your trade that makes it no longer a good idea...then get out. Why wait for the stop, if you think the trade will fail based on new information? (However..you must Always monitor your trades, and if you find you are getting out of eventual winners on a regular basis, then this would call for changes in your tactics). As you monitor this trade on 10/4/2011, you see that though the market has broken through the longer term lows, it is not selling off as you thought it would. By 10-11:00am you see no continued selling and get out with a small profit.
By 2:30 pm it is clear this market is not selling off the way you thought it would. You have had no trade since 11:00 am, but you continue to watch. You think that the market still can break harshly lower, but it does not......and then, you start to see buying. (Chart on left). You were expecting that this might happen (WHY...Because if a market cannot go lower, it will then try to go higher!). You know that the shorts may come to cover, so shortly after 2:30 when the next 30 minute bar goes higher than the one previous, you go long. Again one contract (pre decided). Your stop is the low of the previous bar, which is about 10,350. You KNOW, that you must be very careful because of volatility, and you have a stop order entered (NOT in your head). Your profit wil be the longer term low at 10,510, but knowing that you don't want to try to milk every ounce out of the trade you put in a buy at 10,495. Your trade works and you make the profit.
Your trade worked. You are happy with the profit, BUT.....there is always a but! The market keeps going higher. You are sick that you got out too soon. (But you did not get out too soon. You got out at the right time. The profit objective in your plan). Why is the market going higher?
The market is going higher. You see that the buying went well above the longer term low level, and continued into the market close. You think about this overnight. What is going on?
You realize that it is short covering. Everyone who thought that this market would go MUCH lower, now has to be reassessing that idea. They have to now think that it might not go lower at all. The overnight continues higher. Now your thinking has changed (as it must) and you think that this market will likely see further rise as the shorts cover. You decide to go long. But where? How?
This is where Trading can be tough. You have a good idea. You think that you "KNOW" you are correct (you can never "KNOW"). You want to be long, but where is the entry? Where is the stop? The market is set to open WELL above the previous longer term lows (see chart left)
Since they "KNOW" what will happen, and the stop is difficult to set, some traders will go without a stop. NEVER do that!
But you must come up with some idea. A few options.
You can:
Let me explain why you must have a stop. Because if you are wrong, and the market turns on you, you have to have thought this out ahead of time and KNOW what you must do. You cannot analyze and decide under that kind of duress. See chart right, showing consecutive UP bars after the open. A trader could have used the ohlc idea for his stop. But you must have a stop.
Often I comment on the importance of using stops in your trading. You must use stops and most importantly you must have a plan. Your stop does not have to be entered....that is to say that you can keep a stop in your head and not put in the actual order, but you run a serious risk when you do that. Volatility can be sharp, and harsh, and can take your money. I want to show you an example.
The bond futures market is very liquid. You can find a buyer or seller at most prices, most days. But sometimes that is not the case and a mental stop (or in this case even an entered stop) may not give you the protection you expected.
Today at 8:30 am the U.S. government released the jobs report with the unemployment rate. It was much better than expected. This implies more growth, possibly more inflation, and thus lower bond prices. I have stressed to be careful trading around these reports, and today was an example of why.
Take a look at what would have happened to you if you had been long bonds at the time of the news release. It is important to note that whether you had a stop entered or not, you would have been killed financially! The one minute chart makes it obvious how severe the drop was. The line chart makes it more obvious. THERE WERE NO BUYERS!
ALWAYS, be prepared for this. Know your markets. Know when you can, and when you cannot trade. And don't trade without stops.....but also don't be fooled into thinking that stops will always protect you...THEY WILL NOT.
You have been watching the bond market and you notice that over the last four trading sessions, the price of the thirty year bond has come to "balance" within a well established trading range. You know that any break from this range may be a good trade so you decide to go with any break from balance. (The two charts show the established balance, one WindoTrader market profile, one bar, both show the same days).
The jobs report comes out and BAM!, the move is done. In less than one minute price goes from 144 27 to 124 22. YOu could have had a sell stop in with the price of 144 06, at the lower level of balance....and been filled MUCH lower at maybe 142 25 or so. THE MOVE IS OVER! DONE! Or so you think. What can you do now. How can you trade this move?
There is no easy answer to this question, but here are a few things to consider.
But Once the move is done, as today, there are still trades to be made. You just must remember to have and follow a plan.
Let's look again at the bond market. I said that you must respect a 2 point move, and you must. The odds favor down from here, though sometimes such a move can be overdone. But rarely, will it retrace quickly, even if that is the case.
It is 1:18 pm as I write this and I surely do not know what will happen this afternoon, or in the days to come. But as I look at the Market Profile Charts (WindoTrader..Dow left, bonds right) I can see one timeframing occuring in both the equities and the bond market. One timeframing refers to a situation in which (on a profile chart) each successive time period is lower (or higher) than the preceeding. So normal retracements are occurring, but there is a clear trend. I like market profile charting because it helps filter out some of the noise and make it easier to see these things. As I write this the bond price is at 142 15, well below the initial low of 142 22, so there are still sellers. And I think after this move there may be more to come. Price is approaching the low in "D" period of 142 11. F, G, H, I and now J periods are showing "one timeframing".
Now if we look instead at the equities index (Dow), the opposite is occuring. We still have one timeframing, but it is Up, not Down. This is not unexpected. The equities are showing similar strength in E, F, G, and now H periods. I will state right now that I think the equities are not as strong as they look, and the bonds not as weak as they look. But history tells me that the bonds could break lower, even substantially lower, after a move like we saw after the jobs report.
Looking at the two charts (Dow left and bonds right) we see that the Dow chart (ym) shows a selling tail. For the equities to go higher they must eat through this tail, which will require some work. The bonds, have no such buying tail, and are approaching the lows of the day, and could easily go down harshly more, maybe to around 141 25. If you wanted to go trade here, and I do not, you could sell bonds, or buy equities, using the prior price period high (for bonds) or low (for equities) as your stop. This would be a well defined trade, and with the trend. Bonds surely seem to be a better trade than equities right now because of the selling tail in equities (no tail in bonds), the long term high at 810 in the Dow (still within the trading range on bonds), and even if equities go higher were you to be short bonds, they would surely fall in the event of a new Dow high! ALWAYS TRY TO KEEP CONTEXT IN MIND!
Remember this too, if equities do not go higher from here, in spite of a great jobs report, then we should be skeptical about new highs coming soon, and view today's 130 pt. gain as short covering. If however, the next 3 hours brings in more buyers, then we may be in for an up leg.
One other thing needs to be said as bonds are having trouble going lower right now at 1:41 pm. I think bonds will go lower from here and then balance. But if they cannot break this low, that would signal this move may be overdone. Some of you might think it would be good to be Contrarian and buy bonds. So let me say this: Being a Contrarian does not mean being stupid. It does not mean stepping in front of freight train. It does not mean selling JUST BECAUSE everyone else is buying. It means thinking on your own. Once this move has settled (likely in a day or two), then you can buy bonds if you wish, BUT NOT NOW, despite what I said yesterday about the bonds showing strength. A new day brings new information and we must think, and act, accordingly.
Yesterday (Friday 2/3) was one of those days when you could have made a trade using the market profile, and trading off of the excess depicted. The 8:30 am jobs report was unexpectedly good. So what are traders and investors thinking? They are thinking that after 3 1/2 years this is it! We are finally ready to move into prosperity, increased GDP, prolonged greater employment, and sustained growth. Whether that is true or not is of no concern, that was the mentality yesterday. So let us examine what happened and where we MIGHT have made a trade. (I saw this, but did not take it, instead going with a short on oil for some of the same reasons).
Look at the bar chart on the left, showing the end of trading on Thursday, and the gap up after the jobs report on Friday. With unexpected news such a gap is not uncommon and most of the move is done is seconds, sometimes with no trades in the gap. (Look at the bond market move yesterday on the same news which is outlined above).
Traders and Investors get excited on good news. Sometimes they get too excited and often the trading may move to an extreme, before settling back in the other direction.
Let's now move to a market profile chart of yesterday's trading and see what happened in successsive time periods. As I have said elsewhere on this site, I like profile charting because it helps filter out some of the "noise" in trading, allowing the bigger picture to stand out.
When we move to the profile chart (right), we see that the first two periods were off to the races. The Dow opened at 12,778 and within the hour was up to 12,833. Who knew how high it could go?
Experienced traders would have recognized that "Excess" could come into play. The Dow by 10:30 "might" have seen the highs for the day. Which is exactly what happened. (Note that I say "might" here. Retrospective trading is ALWAYS successful. But in real time, no one ever knows for sure what will happen. You may recognize favorable odds for a trade, but that is the best you can do).
By 11:00 am the C period high was in at 12,811. Now there was excess in the B period and a trader could have gone short the Dow around this 12,811 level. Even though this trade would have worked, you would have been trading against the bullish trend for the day. This can be dangerous. So a better trade might have been to go long around the B or C period lows, using a stop somewhere in the A period 20 point "buying tail" from 12,758 to 12,778. This was established when the A period tested the morning gap, selling twenty points into that gap before being pushed back to the open, and then higher.
Again, it is very easy to come back and point out these trades after the fact. During trading hours one might have wondered if the Dow would break back lower and a buy the lows in C,D,E periods might have been stopped out. Of course that is trading. You can never know. That is why you must have a stop. I was not extremely bullish as this was occurring. I did not think the Dow would race to new highs, though that was possible. But there were a few things suggesting that the Dow might not break lower. First, the news on the job report was very good. Second, the bond market was getting killed. Third, The Dow had gapped up considerably, tried to close the gap early and failed. None of these things guaranteed success with a long trade, but they helped establish the context.
I saw this trade, but did not take it. I thought the Dow move was largely short covering, and I did not really want to be long, though I was fully prepared to go with the move it broke to new highs and established a large volume of trading above the old highs.
Trading is difficult. You can never know. That is why you must look for trades that allow you to establish an area in which you will get out of the trade if necessary. You must learn to trade this way. You must learn to pick entry points that allow for these type of stops.
It is vitally important to understand context when trading. You simply cannot open your trading platform, watch the market, and then make a trade. You must have thought things out a bit better first. You must already understand what the market is doing longer term, intermediate, and shorter term. You should have a grasp of the technicals, is your market in a range? approaching new highs? nearing old resistance? etc. You must have a grasp for the last few days trading, what happened and why?. You must be prepared for any major reports that are scheduled to come out. You must have a feel for what markets are trading in sync, and which are trading inversely. You must know what type of volume has been trading and what to expect on this day. You must be prepared.
Let's take a look at the bond market again, paying attention to January 17. You are watching the bond market this day and see that at the open, bond price is well below the previous two days of value. (the value area on profile charting is an arbitrarily defined area, within which, 70% of trading occurred on any given day. You could just as easily assing the value area to be 75% rather than 70. The value area is meant to define the area within which most of the days trading occurred, establishing what traders for that day decided was proper "value" for the product in question. It is simply a reference.) Also, in this example, the 16th was the MLK holiday so that would have to be considered and it would indicate we might not really have two full days of balance, but we will still use this example for our purposes.
So on the morning of the 17th, price opens lower than the previous two day value area, and 2 day balance. Will price continue to go lower, or will it return to the balance and value established? You see that in the first four time periods, A-D, price quickly climbs into, and across to the upper limit of the value area. So now you have a possible trade. You can fade this price move, anticipating that price will again move to the lower boundary of the established value. But how exactly do you do this? Where do you enter? Where is your stop? REMEMBER, EVERY TRADE, these things MUST be thought out ahead of time. You cannot wait until faced with a trading dilema to try to decide what to do. Do not do that to yourself. Think out your trade in advance.
The profile chart shows that in D period, price has moved to 145 05. The high from 2 days ago was 145 11, and the previous day high was 145 05, with the previous day being an "inside" day, showing balance. (remember that inside days indicate that traders are unsure, they are trying to digest information or waiting on new data, before pushing prices one way or the other). So with price now at yesterday's high, 145 05, this might be as high as price will get. What do you do? Do you sell now at 145 05? Well, you could. But that would be "trying to pick the top", as they say. This can hurt you. The better option would be one of two things, either wait for price to begin a descent from this level, or wait for price to "test" higher and then retreat. Only then would you go short. I much prefer the later of the two, but that often simply doesn't happen. If it does happen, then you have your stop. You watch price go higher, test, see some stops on that end executed, then you see price begin to decline, often quickly. Then you can go short using the high of the "test" as your stop.
Here we see that price continued to go higher in E period, but only by one tick, to 145 06. And F period only reached to 145 05, before falling. Had you waited until G period to go short, you missed the trade. So here you would have had to be watching a shorter time frame (perhaps 5 minute) bar or candlestick chart. You then could have gone short after the first bar that closed lower, or after the first bar that had a lower high than the one prior. Your stop would then be just above the 145 05 high. Perhaps you could have set it at 145 06. Now, granted, that is a very close stop, and you WILL get stopped out often if you trade like that. But that does not matter. And more importantly, you will not have large losses. We see in the first profile chart that the low of the value area on the 13th was 144 26. So you could have been looking for profit just short of this level, say 144 28 or 27. We see in the second chart that price actually went to 144 22. That would be great to get that type of profit, but you cannot expect to get the entire move and a good trader would be out well before 144 22, because he would recognize that his odds were quickly falling.
When you are trying to decide whether to take a trade, you must be thinking about context. If you thought that price were likely to fall sharply back out of the value area, then you could use a trailing stop. But if you thought that balancing was more likely, then setting your profit objective at the bottom of the value area would make more sense. Once you decide what your objective and your stop are, then you can analyze whether or not the trade is question is worth the risk.
Develop good habits with your trading. Always think out your trades AHEAD OF TIME! Always know your profit objective, and especially your stop. If you think that something could change your idea of what may happen mid trade, then fine, think through that ahead of time and know what to look for and how you would respond.
The typical Novice trader thinks through his entry. He or she puts a great deal of thought into where they are going to get into their trade. But they do not put nearly the work into thinking through other factors, stop, profit objective, how much to risk, etc. If you are reading this, then you want to be a successful trader. You know that most who try this profession are not successful. You must be different than most. You must do the things that few traders do. You must think through all these things ahead of time.