As traders we have all heard the old saying "cut your losses and run your profits" countless times. It is one of those pieces of advice that is both simple and logical, and yet frustratingly hard to implement for the majority of those actually trading.

Today, we want to look at this problem from a psychological perspective. We know by its very nature that the market moves up and down - or to be more mathematical, reverts to the mean - much of the time. As a result of this, when new traders find themselves on the wrong side of the market and losing, they hope at some point that it will come back. The flipside of this, of course, is that if they are on the right side and winning, they worry that it may turn and that they may give some, or worse, all of their profits back. The reason it is so hard to overcome this mindset is because it has been programmed into us. As one trading psychologist wrote, this problem is due to the fact that we are "taught" from an early age that:

a) If we lose something it will eventually come back (e.g. If you lose your car keys, do not worry, they will eventually turn up)
b) If you see something, take it or you might lose the chance (e.g. If you see money lying in the street, pick it up quickly because it may not be there for long)

And so these attitudes translate into our trading. However, to be a good trader requires going against what we have had ingrained in us. It often requires going against what both our heads and our hearts tell us. The real reason trading is so hard is that we need to reverse how we think: when trades are going against us we should be fearful not hopeful; when trades are moving in our favour we should be hopeful rather than fearful.

So how do we manage to do this?

One of the ways to remain disciplined in taking your losses is simply to pick a point before you place a trade that, if the market hits it, proves you are wrong in your analysis. Once this is chosen, you should never, ever, move your stop further away. Many novice traders choose a stop and then as the market moves towards it they manage to convince themselves that the market will turn after their stop is hit and therefore justify moving it further away. It is important to remember that the market has a way of frustrating every trader, but the greatest traders are flexible. If you are wrong in the short term, close your position and wait on the sidelines where you can see clearly until the market moves in the direction you thought it would. Timing is everything when you are trying to make a living do this. If your timing is wrong, then you need to take action and prevent losses. Sometimes the market may give you another chance but you can bet the time you need it to most, is the time you will not be given it!

So, that's how you should cut losses. How about letting profits run?

If you are in a situation where the position you have taken is significantly in profit, take a minute to sit quietly and think rationally. You need to focus on the fundamental thing that your position is now telling you i.e. you have called the market correctly. A key thing to remember in winning trades is that being up should not be a justification for getting out. This means that you should not look at your P&L and then begin to look for reasons to exit your trade. It all comes back to having a trading plan. A trader that wants to succeed needs to constantly remind themselves why they took the trade in the first place, where they originally thought the market was going to go and as a result, whether the reasons for still being in it are valid.

Successful traders are able to accept they are wrong and make the situation right by getting out but at the same time they are able to see when they are right and can fully maximise their opportunities by holding on with the strength of their convictions.

The central role played by US monetary policy, including Q.E., and the $ in global financial market correlations; the implications of Jean Claude Trichet omitting the phrase “strong vigilance” from yesterday’s E.C.B. introductory statement; the significance of a potential uptick in the US unemployment rate in today’s Employment Situation report. All of these are key fundamental issues that professional Proprietary Traders must understand and whose evolution they must be able to track and interpret in the blink of an eye. However, the most capable fundamental analysts do not necessarily make the most capable traders.
Much time is dedicated during our 12 week training programme to developing trainees’ ability to understand the fundamental backdrop to the global financial markets. Also, beyond the 12 week process, traders enjoy the benefit of both weekly strategy sessions to plan for the key events of the coming week, as well as ongoing informal discussions with senior traders on the trading floor. However, the vital question often overlooked by novice traders is “how do I translate this fundamental information into my trading?”
There are no prizes in an environment such as Futex for being able to out-analyze either your peers or any other market participants. Rather, it is the ability to effectively translate such understanding into your trading, and thus your end of day/week/month P&L, that really counts. It takes both time and deliberate practice to develop the skills required to interpret fundamental information, and yet more time to be able to effectively translate this understanding into trade ideas. However, the process is much quicker if individuals are acutely aware of the need to make this end-to-end link from the outset. For example, from day 1 of the 12 week training programme, trainees are involved on a daily basis in up to 2 hours of reviewing market fundamentals. At every step, a direct link is made between what is read in either the Financial Times or in an analyst’s report and trading. The clear rule of thumb is – unless you can take a fundamental piece of information and translate it into a specific trade idea or it directly supports/enhances your trading decisions, it is superfluous.
Proprietary Traders have to interpret a huge amount of information on a daily basis. A key skill is being able to sift through this abundant information and hone in on that which is most important. As a novice trader, it is all too easy to get bogged down in excess information at the expense of effective trading and paralysis by analysis is a common outcome if this is left unchecked. Making consistent profits is the outcome goal for all of our traders and nothing should distract them from the relentless pursuit of this.

This week we would like to set the record straight on a form of technical analysis some of you may have encountered known as Elliot Wave.  Although a very common tool used by technical analysts, Elliott Wave is unfortunately also commonly misused as many analysts fail to adhere to all of the rules set out by both its creator and it's most prominent experts. 

Elliott Wave

On any given trading day, the emotional highs and lows experienced by a trader are more extreme than the average person’s over the course of a month. But hey, isn't that part of the enjoyment? Feeling alive? If you answered yes to this question, you need to take a long hard look at yourself and your motivations for being a trader. You need to realise that we don't trade to experience this feeling, WE TRADE TO MAKE MONEY.

A master trader does not trade for a buzz; he is robot-like, executing his trades devoid of emotion. He cuts his losses when he is wrong and he feels little anxiety about running trades further than he originally anticipated when it is appropriate to do so. He is a master trader because he can make the hard decisions which most people aren't willing to make and therefore profits from those situations when the average trader fails So how does a trader become so cold and calculated?

The answer, like any other performance discipline, is practice. To be the best you have to be willing to go further than anyone else to achieve your goals. You must train yourself emotionally to be able to handle challenging situations so that when the real thing happens, you have already gained the experience of how to deal with it - your response is instinctive:

So, you need to rehearse the situation in your mind; visualise the market changing in front of you and you cutting your position without hesitation having realised your mistake; visualise a move in your favour and actively running the trade further than you originally anticipated; visualise how you will react when being almost stopped out for the day and how to trade when trying to bring yourself back from the brink.

The true champion takes this approach to the extreme. An excellent example of an elite performer who trained their mind in order to win is seven-time Mr. Olympia, Arnold Schwarzenegger;

“To be a champion you cannot have any outside negative forces coming in and affecting you. Let’s say before a contest I get emotionally attached to a girl, that can have a negative effect on my mind and destroy my performance. Therefore, I have to cut my emotions off and be kind of cold before a competition. So that’s what you do with the rest of things. Right now, if someone steals my car from outside my door I don’t care, I can’t be bothered with that, the only thing I would do is call the insurance company and have a laugh about it. I trained myself for that, to be totally cold and not to have anything go into my mind. It was a sad story a few years ago when two months before a competition my mother called me and told me my father had died. She asked if I would come home for the funeral and I said no, it’s too late, he is already dead and there is nothing that can be done. I’m sorry.”

Arnold Schwarzenegger, Pumping Iron

Futex Investment & Trading Academy

"The Ultimate Trading Career" ]]> http://www.futex.co.uk/inbox-education/emotions-in-trading/feed/ 0 http://www.futex.co.uk/inbox-education/futex-strategy-session/ http://www.futex.co.uk/inbox-education/futex-strategy-session/#comments Fri, 26 Nov 2010 09:13:09 +0000 John http://www.futex.co.uk/?p=3622 This focus of our strategy session this week was the market impact of Sunday’s confirmation that an EU bailout of Ireland was taking place and the continued, growing concern regarding other Eurozone peripheral countries.

Financial markets look for and thrive upon certainty and confidence

The markets had a very interesting response to the Irish bailout. Initially, markets reacted positively with a rally in Equities. This was followed by a significant sell-off as even though the bailout reduces the risk of Irish default, this is not necessarily to be regarded as good news as it will pose a strain upon the Eurozone - Ireland being the second country to require a bailout in 6 months. The concern now is of a domino effect occurring within the Eurozone with the market focus turning towards Portugal and their ever widening yields which are fast approaching the 7% figure. A continued rise in Portuguese yields, as well as those of Spain, will lead to a further decline in Equity markets. By contrast, stability in these yields and a return of investor confidence will lead to a turnaround and an increase in Equity prices. 

This focus of our strategy session this week was the market impact of Sunday’s confirmation that an EU bailout of Ireland was taking place and the continued, growing concern regarding other Eurozone peripheral countries.

Financial markets look for and thrive upon certainty and confidence

The markets had a very interesting response to the Irish bailout. Initially, markets reacted positively with a rally in Equities. This was followed by a significant sell-off as even though the bailout reduces the risk of Irish default, this is not necessarily to be regarded as good news as it will pose a strain upon the Eurozone - Ireland being the second country to require a bailout in 6 months. The concern now is of a domino effect occurring within the Eurozone with the market focus turning towards Portugal and their ever widening yields which are fast approaching the 7% figure. A continued rise in Portuguese yields, as well as those of Spain, will lead to a further decline in Equity markets. By contrast, stability in these yields and a return of investor confidence will lead to a turnaround and an increase in Equity prices.

The absence of certainty and confidence is bearish for general market sentiment, so the market is currently looking to the Eurozone peripherals to provide this confidence which will allow Equity prices to rise once more. The market is also currently focusing on short-term news so traders must be aware of this and also when this tendency comes to an end. When reacting to news the market is making it very difficult for traders to profit from their fundamental view. Often the market will move in a contrarian direction until such time as the herd begins to dismiss the validity of the original news and begins to reverse both their opinion and trades. Only once these “weaker” participants are out of their initial positions does the market subsequently resume its correct, fundamentally-driven direction. As a result, we are firmly of the opinion that such price movements on the back of fundamental news are fading opportunities. It is important when the market is trading in a nervous state to be patient. Currently, markets have a tendency to drive up and stop out weak shorts only to then drive down and squeeze out weak longs. Only after this do the markets make a more concerted move to new price areas. At the moment, the original price movement is often followed by a larger move in the opposite direction within any one trading day; referred to as an open – rejection - reversal. Referring back to the situation in Ireland, over the near future it is important to look at the conditions of the bailout deal and bear in mind that even though there is a reduced chance of Ireland defaulting on their debt, the current situation in Ireland is negative for the markets. Ireland’s troubles have raised a big question mark over the strength of the Eurozone and whether there is a threat of an imminent break-up. On Monday this was reflected in an 11% increase in Portuguese Credit Default Swaps meaning the market is very aware of the likelihood of a domino effect occurring in the Eurozone. The market will now focus on Portugal and, as it did with Greece, forget about Ireland and its issues once the bailout package has been released until such time as the next stage unfolds which would be default. This means that due to the current state of the Eurozone, the Euro currency is still a sell and a risk-on/risk-off type trade. Note of caution - bear in mind the current economic backdrop which is that upon dips in Equity markets, the buyers step-in. However, this will come to an end and once the dips are no longer being met with aggressive buying by the market, we expect a significant drive lower in Equities to establish new lows. Trading Tip of the Week: When the market isn’t acting in line with your scenario you must let the market to do as it wishes and leave it well alone or be prepared to jump-in on the other side – either way, you mustn’t fight it. Futex Investment & Trading Academy "The Ultimate Futures Trading Education"

 

	Common statistics provide a very good explanation of why this practice cannot succeed in the long run. Statisticians suggest that trading is a 50/50 “bet” on whether a price goes up or down. In reality, many markets will only trend 20% of the time and actually go sideways for the remainder. If we were to execute 100 trades then statistically we would have 80 small winners or losers cancelling each other out. We would also have 10 big winners and 10 big losers. So, if a trader cuts all of his winners short by taking profit and yet runs all of his losers through fear, then we now have 10 big losers and 90 small winners/small losers making it impossible to make consistent profits, no matter how good a trader you are. Futex Investment & Trading Academy not only teaches traders about the fundamentals and technicals of the market but also provides ongoing support and mentoring both during and after training to help traders work through psychological weaknesses just like this one. Futex Investment & Trading Academy "The Ultimate Futures Trading Education"

]]> http://www.futex.co.uk/inbox-education/simple-statistics/feed/ 0 http://www.futex.co.uk/inbox-education/active-recovery/ http://www.futex.co.uk/inbox-education/active-recovery/#comments Fri, 29 Oct 2010 08:15:00 +0000 John http://www.futex.co.uk/?p=3331         In trading, as in sport, injuries unfortunately occur! These injuries can be one-off severe blows or general wear and tear from multiple hours of intensive performance at an elite level. Either way, injuries are an inherent part of both pursuits. Performance management is an integral part of every elite sportspersons career and trading should be no different. The ability to perform at an optimum level is conditional upon your readiness to assess with objectivity how you are currently performing against your benchmark levels. This means analysing your trading performance regularly both in P&L terms and, more importantly, in terms of the effectiveness of your daily trading processes. Only by analysing performance in this manner will any trader be able to identify when performance is less than optimal and thus introduce performance management protocols to address it and turn it round. It is unfortunately an all too common occurrence for traders to push-on regardless of a lingering injury only to pay the price by way of an enforced absence when the injury becomes prohibitive to trading.

So, what can you do to manage your performance better and to recover from injury?

Firstly, we can borrow sport’s key concept of periodisation to help us achieve these dual aims. By understanding clearly under what conditions we perform best, as traders we can be more active, focussed and aggressive when these conditions present themselves. Any sportsperson realises that they cannot perform at their highest level every second of every day and trading is the same. You should thus target key periods of the year (macrocycle), particular months (mesocycle) and weeks/days (microcycle) when conditions are favourable for you as an individual. This targeted and intelligent approach is one way to improve performance and avoid injury. Prevention is a far more effective technique for injury management than rehabilitation!

Secondly, if through our regular analysis we identify a niggling injury, we should build in a period of active recovery to address it immediately rather than waiting for the injury to develop further. Active recovery might involve a short period of time away from the markets with a clear objective of retuning you to full health swiftly. This means actively rehabilitating the injury through reflection, analysis, reviewing existing goals and setting new goals. It doesn’t mean taking a few days off to “unwind” and expecting anything to have changed upon your return!

As we move into the last 2 months of 2010 we are faced with numerous key fundamental events that have the potential to create the volatility upon which we all thrive as traders. Therefore, it is essential that we are fully prepared mentally for what promises to be a busy few weeks leading into the Christmas period. This means active recovery, if necessary, has taken place, niggling injuries have been addressed and you feel rested and ready. Only if this has been done effectively will you be in a position to maximise your returns before breaking out the mince pies to celebrate another profitable year.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education” ]]> http://www.futex.co.uk/inbox-education/active-recovery/feed/ 0 http://www.futex.co.uk/inbox-education/trader-efficiency/ http://www.futex.co.uk/inbox-education/trader-efficiency/#comments Mon, 25 Oct 2010 08:18:04 +0000 John http://www.futex.co.uk/?p=3256     Dr K. Van Tharp, the world’s most famous trading psychologist, believes that one of the elephants in the room for traders is trading accuracy. Or, in other words, trading self-sabotage and mistakes. An issue many young traders fail to understand is that a trading mistake is not a losing trade and the right trades are not always winners.

So what does Van Tharp mean when he talks about trading mistakes?

According to the great psychologist “when you don’t follow your rules, you make a mistake. It’s that simple. And making the same mistake repeatedly is called self-sabotage.” This is a very important distinction to make because without a trader evaluating his performance objectively and instead purely relying on monetary results, he will not learn from his mistakes and progress toward becoming a master trader. In accordance with studies by the Van Tharp institute, Trader Efficiency is a measure of how effective a trader is in making mistake-free trades. So, an individual who makes five mistakes in 100 trades is 95% efficient. In the last five years the Van Tharp institute has documented the mistakes of their traders so that they can look at their efficiency levels. They have found that 95% is actually a very good trading efficiency level. However, the majority of traders who do not spend time learning from their mistakes by reviewing their accuracy trade at only 75% efficiency – a very poor metric. “That’s one mistake in about every four trades!” (Van Tharp)

So what is the best way for a trader to evaluate their performance?

There is no easy answer to this question and the answer can be unique to each individual trader. One common way people evaluate their performance is to scribble a quick note of problems as they occur during the day (not wasting too much time) and to perform a thorough review of their performance at the end of the trading day. Not only does this review enable traders to learn from mistakes but it gives them tangible lessons to incorporate into the following day’s trading goals that they should set for themselves. This type of personal reflection and analysis is essential for any trader. The repeated review process will help to instil the gut feel for right or wrong trading that is so evident in master traders.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education” ]]> http://www.futex.co.uk/inbox-education/trader-efficiency/feed/ 0 http://www.futex.co.uk/inbox-education/wait-for-your-cue/ http://www.futex.co.uk/inbox-education/wait-for-your-cue/#comments Mon, 18 Oct 2010 10:07:08 +0000 John http://www.futex.co.uk/?p=3177         In trading, as in many facets of life, timing can be everything. A common complaint from traders is that they were right, but got stopped-out before the market acted as they had anticipated! This is especially common when a trader establishes a view on a purely fundamental basis. While markets are very fast to adapt to breaking news, the large number of participants in a market at any one time, together with the large amount of information available to them, means that it can take a while for the collective view to manifest. Add to the mix the human emotions of fear and greed and it is also common to see markets over or undershoot.

There are many tools and techniques that can help a trader improve his timing, the broadest of which is technical analysis. Common examples include the failure of a market to break a key support or resistance level and technical indicators such as momentum indicators or volume - which we discussed last week. However, one of the most effective entry signals which can facilitate accurate timing involves nothing more than the market behaviour itself. While this sounds too simple to be a valuable signal for entry, it is important to remember that in the markets the simplest solution is usually the best. There is an inherent tendency for novice traders to seek complex solutions to common problems such as timing which only end up causing more harm than good. In Jack Schwager’s famous Market Wizards, both Bruce Kovner and Michael Marcus attest to this view; both traders formulate their ideas using fundamental information but neither will enter a trade until it is technically appropriate and the market has shown its hand. Their justification for this is that “there are always well-informed traders who know more than you. They know which way to go and will vote in the market.” It makes sense to use this fact to your advantage.

So, what are some examples of such signals commonly shown by the markets?

One of the commonest signals is how the market reacts to new fundamental news. A recent example, witnessed by some of our Equity Index traders, was during the early stages of the European Sovereign Debt Crisis. Initially, when the PIIGS economies were first incurring ratings downgrades, warning bells sounded in many traders’ heads that, from a fundamental perspective, we were going to witness a severe bear move. The problem was that the equity markets were trending-up. Next, we began to see worse than expected economic data, but the market shrugged it off and continued to trend higher. This was a clear signal that this was not an effective time to enter aggressive short positions; the timing for entering the trade was wrong. To the novice trader this can be incredibly frustrating; to the master trader this is very valuable information. Finally, after a fortnight of blind optimism, the markets reacted “correctly” to poor economic data. Not only did we see worse than expected data resulting in the market aggressively correcting, but any better or in-line with expectation data also resulted in the market selling-off. This was an ideal situation for our traders; a fundamental view, backed up with evidence from the market that this view is correct and highly profitable trading as a result. Patience then, in trading, certainly is a profitable virtue.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education” ]]> http://www.futex.co.uk/inbox-education/wait-for-your-cue/feed/ 0 http://www.futex.co.uk/inbox-education/volume-the-quiet-member-of-the-family%e2%80%a6/ http://www.futex.co.uk/inbox-education/volume-the-quiet-member-of-the-family%e2%80%a6/#comments Mon, 04 Oct 2010 15:24:02 +0000 John http://www.futex.co.uk/?p=3064 Many technical indicators have been developed to clarify the relationship between supply and demand. Unfortunately for the new trader, there is an abundance of overcomplicated trading literature which covers the more “exciting” trend or momentum indicators as both traders and academics alike attempt to discover the holy grail of market mastery. However, in our experience, when asked what specific indicators they use, elite traders answer “the simplest ones”. One such group of simple yet highly effective indicators, the least talked about member of the indicator family, is volume.

Why is volume important? 3 words; volume precedes price. This basic technical concept was discussed as early as the beginning of the 1900s by authors such as Richard Wyckoff and was originally used to establish a market’s strength or weakness. In the days of pit trading, traders would use the increase in noise that accompanied elevated trading activity i.e. an increase in the volume of contracts traded, to decide whether an established support or resistance level would break or hold. Not long after that, it became a staple and stand alone indicator, implemented when looking for confirmation of chart patterns. For example, a head shoulders pattern should have diminishing volume during elements of its formation, accompanied with a spike in volume upon a break of the neck-line.

Two common methods for observing volume are: looking at the change in volume from the prior time period, or simply looking at the ebb and flow of volume in real-time using time and sales. The original and still viewed by many as the most valuable way to chart volume is using cumulative bars directly below and corresponding to the relevant chart. The second most common way to view volume is a cumulative tally. In 1963, Joe Granville created On Balance Volume (OBV) which keeps a running total of volume which is increased or decreased in line with the direction of the market. For example, starting at 0 if the following day is up then you would add the volume to 0. If day two is a down day, then you would subtract the day’s volume from the running tally. The principle is that volume is the motive behind price action. There are many variations on these basic concepts, but as mentioned earlier, simplicity is often the safest bet in trading and certainly when it comes to technical analysis.

The most important principles of volume are: if a move is not accompanied with strong volume, it is likely a false break and will be short lived; if a market breaks with strong volume it will in all likelihood continue; if a market is trending and peaks with elevated volume, the market may have capitulated which could signal a top/bottom. To learn about volume in greater detail, we strongly recommend picking up a copy of any of Richard Wyckoff’s books such as The Day Trader’s Bible.

An understanding of volume is essential to any trader, irrespective of his chosen timeframe - be it seconds or weeks. However, as with all technical indicators, a trader should not rely solely on one indicator in isolation when making trading decisions. A trader must think of them as pieces of a much larger market jigsaw and weigh the evidence they produce objectively alongside all other available market information.

Futex Investment & Trading Academy

“The Ultimate Futures Trading Education”