Chart Addict's Q & A

Copied here for my future reference.

This will be the weekend educational post. I decided to openly answer some recently submitted questions. Apologize for any grammatical errors in advance.

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1) “OpihiMan” wanted to know about my trading routine, post-trade analysis, record-keeping, my definition of trading success, if I pay attention to macro situations/news, the stylistic differences between day and swing trading, and whether I subscribed to any paid services.

a) Trading Routine - I create my watch list the night before. Then, I try to be ready 2 hrs before the market opens. I watch the futures market as well any gap ups or downs on any of the stocks on my watch. I plot them on “blank boxes” to see if they will fade or break higher. I also plot the approximate open of the market on the chart. I go through my scan one more time in case I missed anything (and I do miss things anyway).

b) Post-trade Analysis - I review the daily charts of my holdings and the market indices. I mark all holdings as either “hold” or “possible sell” for the next day. The ones with a “possible sell” are given higher priority the next morning.I also monitor the Asian and European markets and plot them on the daily as they progress.

c) Record-keeping - A simple spreadsheet for the trades. The blog is my trading journal.

d) Trading Success - My personal definition is measured on monthly percentage returns. My goal is 10%+ per month. If I don’t hit double-digits in any given month, then I know I did something wrong. March 2009 was the first month in 15 months where I made less than 10% and I did make quite a few mistakes.

e) Macro Situation/News - I do pay attention, but I don’t put much weight on them at all. I let the charts do the decision making. Sometimes, news can gap the markets beyond a consolidation range and form a breakaway, in which case it is technically significant.

f) Day/Swing Trading - same patterns, different time frames. Tolerance for risk and loss and the margin of safety is greater for swing trading than for day trading.

g) Subscriptions - I only have a monthly membership to Stockcharts.com, which I highly recommend for candlestick chartists.

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2) “Kush” wanted to know how trading the opposite of the media (CNBC, Cramer) makes you money, finding a trader that’s a contrary indicator, best time to buy, and FAS/FAZ range trading.

a) Trading Opposite of Media - I use CNBC only for breaking news, economic data results, etc. I do not watch Cramer’s show and ultimately, you shouldn’t blindly trade a stock because someone mentioned it. You have to do your own homework. Sometimes the media is right, sometimes they’re wrong. You should trust in your decisions based on fundamental and/or technical facts.

b) Contrary Indicator - Josh. He bet against me for 7 weeks, and look what happened to him.

c) Best Time to Buy - For anything, the best time to buy is when a high-probability setup emerges. Doesn’t matter when. Same goes for short setups. High-probability setups ensure that the odds are in your favor in most cases.

d) FAS/FAZ Trading Range - First of all, when and if I trade FAS/FAZ, I use the SPY. It may not be as accurate, but it will help when the market gets to become too volatile and it can help you control your emotions. I personally do not recommend day trading within a tight range, such as the triangle we’ve been seeing for the entire month of May. The range is about to close, and the market will make a major imminent move.

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3) “GonzoTrader” wanted to know what intra-day scans I am running, the most reliable chart setup, pre-market homework, setting stops and limits on buy orders, finding stocks with the most market orders pre-market, and what sectors are in play for next week.

a) Intra-day Scans - I hardly run intra-day scans. I get my slaves to do that. Since I am a swing trader, I can get away with scanning after the market closes each day. My scan right now is all stocks between $1-3 with volume above 100K. Prior to the dollar stock circus, my “normal” scan was stocks above $5 with volume above 500K.

b) Most Reliable Setup - This one goes to the High-and-Tight Bull Flag. I drew it out below:

c) Pre-market Homework - refer to (1a).

d) Setting Limit and Stop Buys - In cases where I believe that a multiple number of stocks will breakout at or near the same time, I will set limit orders immediately above their breakout resistance levels. The vast majority of time, I use market orders and manually make entry.

e) Finding Stocks with most Pre-market Interest - You can use http://money.cnn.com/data/premarket/nyse (also contains NASDAQ stocks). You can also go to http://www.allstocks.com/markets/premarketactive.html or http://dynamic.nasdaq.com/dynamic/premarketma.stm.

f) Next Week’s Sectors in Play - TBD, but I am long biotech/pharma, oil/gas, and commodities.

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4) “Cuervos Laugh” wanted to ask how I managed my information flow.

a) I actually do not read blogs on my blogroll unless something is brought up to my attention. As for the links on the sidebar, I primarily look at pre-market action and analyst upgrades/downgrades. The link library is for the readers, not me.

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5) “P” wanted to know about using different time frames.

a) Using Different timeframes - Intra-day, daily, weekly, and monthly time frames should all support each other. Which time frames should you use? It all depends on your holding period. I use intra-day and daily charts since I am a swing trader. If you are a buy-and-hold investor, you should use the daily and weekly charts more frequently. Intra-day and one-day breakouts or breakdowns are your earliest signals for entry or exit.

When you mentioned the SPY, the weekly pattern is not a bear flag, it is a bull flag as noted below:

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6) “Juice” wanted to know how I spot s FEED, CAR, DDRX in it’s early stages and how I can tell if it’s going to go to sub-$1 to $5+, and if ATSG can get over $5.

a) Finding Next Multi-bagger - This is a difficult question because no one knows for certain whether a stock will go from sub-$1 to $5+. The only thing that I can tell you is to keep true to the technical pattern of the chart. If the chart remains intact, then hold the stock. It also depends on your time frame. In these cases, you’ll most likely have to be a positions trader, holding positions for several weeks or longer. The important thing is to catch the first high-probability setup for the stock and ride it until one of the wheels fall off.

b) ATSG - I would be mindful of the May 2008 breakaway gap down as it will create some resistance. Like I mentioned above, ride the trend until it trends no more. See chart below:

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7) “Kel” wanted to know about target setting.

a) Targets - Usually, my targets are located at major moving averages and support resistance areas. I do not use MA crossovers, because they are lagging. Instead, I first determine which MA a stock is following (e.g. 15-day, 20,day, 50-day, etc.). When the stock reaches striking distance, it is automatically placed on my watch list. An intra-day setup and/or breakout will confirm the entry. As for exits, I usually sell at least a partial position at the first major resistance area (by major, I mean the 50,day, 100-day, MA’s or 200-day or any large previous breakaway gap downs). It all depends on the individual stock.

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8 ) “Susannah” wanted to know about setting stops and exiting positions.

a) Stops - I rarely use them. The last time I used stops was when I was on vacation in Mexico. I use flexible and mental stops and the shorter-term MA’s, such as 15 or 20-day MA’s, dictate my decisions. If a stock closes below a short-term support area, I would most likely exit the position. If I am wrong, I can always re-enter the stock.

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9) “Yogi & Boo Boo” wanted to know how I keep myself from blowing up.

a) Anti-Blowup - Keep most of your positions small. With the exception of CTIC, all of my positions are between 5-10% per position. This way, ff a stock drops -20%, you don’t freak out (you shouldn’t). In addition, make sure your stocks have the best setups, thus ensuring a higher success rate. Sometimes I recommend stashing away your gains to protect them during times of extreme uncertainty.

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10) “Lindsay” wanted to know if I watched any bellweather stocks during the day, hedging long/short positions, the US Dollar, China, hyperinflation, and ETF use.

a) Bellweather Stocks - I do not, but that doesn’t mean people shouldn’t. I keep things very simple, so basically I simply keep an eye on the SPY, my existing positions, and my watch list stocks.

b) Hedging - Hedging is highly recommended during times of consolidation to avoid whipsaw and during times of uncertainty of market direction. Once it becomes apparent that one side has the greater odds of winning, release the hedges.

c) I do not particularly pay attention to the US Dollar, China, or hyperinflation for my trading. I refer to the other bloggers to answer these questions for you (feel free to chime in).

d) Using ETFs - The positives are less vs. individual stocks, diversification. The big negative associated with ETFs (I’ll refer to the 2x & 3x ETFs) is time decay. Over time, price will decay as a result of the daily compounding of the NAV. This is especially true for the 3x ETFs (e.g. FAS, FAZ).

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11) “Fortune8” wanted to know about trading options the “right way”.

a) Options - Not an expert. Comments are open for expert options traders who use them frequently since I do not use them often enough.

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12) “All About Health” asked what my process is for deciding to switch from long to short and vice versa during the day, as well as selecting the right industries/sectors to trade.

a) Switching Sides - Under extreme circumstances, I find myself having to entirely switch sides. This occurred at the March bottom when I was briefly caught short, a mistake that contributed to my worst month in 2009 (+2%). I am not a primary day trader, but the same patterns that apply for swing trading also apply to day trading. Use chart patterns, intra-day moving averages and trailing stops to guide you from one direction to another. It’s all the same thing, just a different time frame.

b) Choosing the Best Industries/Sectors - First, I look at the SPRD sector ETFs for any clues (XLV, XLB, XLK, XLI, XLY, XLP, XLF, XLE, XLU). I then look closer into sub-sectors (e.g. for Health Care, I’d look into biotech, drug manufacturers, healthcare providers, etc.). Then I’d look into individual names. This is a variation of the top-down approach.

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13) “Nashville Cat” wanted to know about gap strategies at the open.

a) Morning Gaps - When a stock gaps within a range/consolidation/S&R, then it is not very meaningful to me and the gap has a higher chance of fading. However, when a stock gaps outside of the above, it has a higher chance of following through. This is not true for exhaustion gaps (which fade anyway), but they are true for breakaway gaps and continuation gaps.

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14) “Relaxsome” wanted to know if I used oscillators.

a) Oscillators - I don’t use them. They are unnecessary. Focus on the basics.

Letter between me and one of my plebes

Sir...Hope everything is going well for you and that you're having fun in the Marines. I can't believe you have been in for a year.

I just wanted to let you know that I'm going to be

bringing the SPEED and INTENSITY come next year because I'm 1st semester Training Sergeant. It's going to be quite strange being a 2/C and if you have any tips about training and what to keep in mind/how it compares to the"real" miliary, I would be very appreciative.

Thanks and talk to you later.

Wells Hamilton

Today at 3:59am

Dear Elle,



Thanks for checking in! Everything has been going very well. I'm almost a year out of the Naval Academy and I'm still waiting around to start flight school. TBS was excellent training, and I'm excited to begin flying whenever they have a spot for me (mid-august is the estimate right now).



WIll you be in Texas anytime soon? I'm on PTAD at UT in Austin, probably until the end of June or so. Perhaps even longer, if they need me.



The "Speed & Intensity" was direction taken from MCDP-1, a Marine Corps publication called "Warfighting". I found it in Nimitz Hall when I was training you guys and decided it had some good stuff to teach during the "grey" time of plebe summer. I later learned that it is foundational to modern Marine Corps tactics, which is referred to as "maneuver warfare."



I also remember reading "Message to Garcia" by Elbert Hubbard to you plebes during the summer time. That was a lesson we were supposed to teach you. In case they forget that this summer, I'd recommend that book for some training. Also, remember myself and Rob Epstein reading you passages from "Starship Troopers"? A few of you guys fell asleep those days. The author, Robert Heinlen, was a Naval Academy grad before WW I and wrote many books. Check that out and take some lessons to pass on to your plebes.



Looking back, I feel as though my experience as a second class was a lesson of trial and error. As a youngster going into my second-class year, I was critical of the leniency of the class of '07 and '06 toward my plebes ('09) and I decided that I'd certainly give my plebes some of the hard time I found beneficial from my firsties, the class of '05.



Choosing to be "hard" on plebes can be a great thing under certain conditions, but destructive under a few misconceptions. The misconception is that being a hard trainer is, in itself, good for their development as officers. The benefit of hard training comes from the confidence they'll gain and the camaraderie which they'll grow into through training.



I considered "easy" second class as simply lazy. Since they didn't rate hard, or ask many questions, I figured they didn't care. This mindset was true to an extent, but became a source of arrogance on my part as a second class. I certainly cared about my plebes and challenged them to become better midshipmen, but my pride and ignorance took me to rate and punish them beyond their benefit. I'm sure you could ask anyone of your soon-to-be Firsties if this was so and they'll agree with me.



Compared to the upperclass who do nothing, the fact is, it's easy to swing to the opposite, and equally irrational side of the spectrum, into being too demanding and challenging. Both sides are equally reprehensible. In the middle ground is the leader who loves his or her plebes and puts in the effort to help them become better people.



First of all, I was "mean". This doesn't equate to irrational abusiveness to plebes, but merely being an asshole. The only real benefit that kind of "leadership" gives is to teach people to learn to deal with asshole leaders. I really doubt that even the sensitive, weak-hearted people who join the military really benefit from experience with assholes. Rather, it is unrelenting insistence on meeting standards, a quality found in few leaders, that actually creates results in their people. You can be encouraging while being unrelenting. Consider your plebes as babies who haven't learned how to walk yet, or have just begun to take a few steps. Would a loving mother berate or abandon her baby for stumbling after trying a few steps? Each of your plebes will have a goal and reason for being at the Naval Academy. Appeal to that goal in them as you show them the correct way to do things. As they're falling short of the standard, make sure they know and acknowledge they're wrong as you correct them. If they don't have a higher purpose and standard they're trying to obtain, they've been failed by their leadership, or they are mistakenly in the wrong place. The latter is a very small minority.



Think about the few things that stand out about the leaders you've had and respected over your *lifetime*, not just at the Naval Academy. You're training plebes to be leaders, not just good, idealistic midshipmen. They need to be taught real skills for leading people. They need to be taught that life will give them NOTHING that they have not earned, even if they've made it to the sparkling Naval Academy (which, by the way, gives literally NO ADDITIONAL BENEFIT WHATSOEVER towards being a good Marine Officer). It is THEIR responsibility, not the Naval Academy's, to develop themselves into leaders and officers.



You're going to have to get up early and miss time with friends because you'll be at blue & gold. Don't let them ever see you look tired or worn out. Let them see a smile on your face when you can, and a look of concern otherwise. Your disappointment will be their greatest fear, because their ultimate goal will be to live up to the standard you set for them. Set it high enough to challenge and transform them, but realistic enough that they can reach it.



Last of all, you have to know yourself. Don't try to fool anyone. Be the leader God made you to be, and strive for THAT fullest potential.



Semper Fidelis



Wells

Alpha Quote

"It may be stating the obvious, but it doesn’t pay to be a super smart bear in a dumb, stupid garbagio stock rally."

moving averages

from here.

The MA’s for the long-term are the 200-day (primary) and the 100-day (secondary). The intermediate-term MA is the 50-day. Short-term MA’s are the 15 and 20-day, and the most important for swing trading.

The most ideal situation is when the 15 and 20-day both provide underlying support. What’s even better is if the 50 and 100-day MA’s also provide underlying support. Right now, in the majority of stocks, the 200-day acts as an initial price target for exit. The 200-day MA is the strongest MA out of the ones mentioned. It defines the long-term trend.

The MA’s also gets rid of headaches and panic attacks. If you know where one of these significant MA’s are located, then you know there will be a bounce, at a minimum (in most cases). Conversely, if a stock is approaching a major MA, you know there will likely be a pullback or failure. Besides price, volume, and the basic chart patterns, I’ve relied primarily on the moving averages to make my trading decisions. I let the MA’s make the call. Stop panicking and impulse trading for no good reason. Let the charts make the decision for you.

Quotes from John Hamilton's Newsletter

Poignant and realistic commentary on the market, from a fundamental perspective:

"ARE WE THERE YET?

We have found that the incessant questions asked by children on a trip are also imitated by adults on CNBC and virtually everywhere else.

We have heard literally thousands of times in the last months “Is it time to buy the financials? Is the market at the bottom? Is it time to get in?” The questions go on and on by many who should know better because, of course, there is no answer.

More than 663,000 jobs disappeared from the economy in March bringing the total in excess of 5 million. Tragically, we seem to be getting used to figures like these. The first three months of 2009 saw the unemployment rate soaring to 8.5% up from 7.6%. This is the highest level in more than a quarter of a century. More than 2 million jobs were lost according to the Labor Department's employment report released on Friday, April 3. Nearly every job category was affected, and Dean Baker, a director of the Center for Economic and Policy Research in Washington said “There is just no way we are anywhere near a bottom. We’ll be really lucky if we stop losing jobs by the end of the year.”

/**********Hammy Note: What would you call a bottom? A)The number of lost jobs per month starts to decline, or b) we actually start gaining employment?***********/

This severe recession/depression was initiated by a crisis in the credit markets. The crisis still exists as no one has yet been able to determine the value of the toxic assets that the banks and the non-banks carry on their books. We believe that AIG still carries approximately $1.6 trillion of toxic assets on its balance sheet. Until an answer can be found that can put a value on the toxic assets held by the banks and “non-banks” the crisis will continue.

Consumer spending appears to have leveled a bit after nose-diving in the last quarter of 2008. Auto sales improved slightly month over month in February versus January, and house sales have been improving in important markets like California and Florida although at substantially reduced prices. These are all most welcome signs, but they hardly negate the overwhelming problems our nation continues to face. Another good sign: Stock and bond markets have been stabilizing when compared to the last five or six months, and there have been rallies in this extremely volatile bear market that have been strong enough to bring risk-takers back into the fray. We are encouraged by these developments, but do not believe they can be sustained until we see concrete improvement with regard to the fundamentals. We repeat that the basic problems, unfortunately, will continue until a workable solution can be found for the all pervasive credit crisis."

Note: all emphasis is mine.

This came from a newsletter issued periodically by John Hamilton at www.hamiltonadvisors.com. As may be apparent, they don't waste resources on a flashy website.

Hamilton Advisors is a investment advisor/management company located in Greenwich, CT, founded by my grandfather and run mainly now by my dad. It's personal service, and you can really get to know the guy who's banking you coin; many of the business relationships turn into lifelong friendships. If you ever consider trusting someone else with your investments, give these guys a call and find out what they're about--you won't regret it!

Chart Addict's Wisdom

from a post in the PPT. this guy was talking about losing a huge amount of money in the stock market as an 18 year old, and the mental anguish which ensued:

"How could this have happened to me? Well, it’s simple. I was human. I did the humanly thing and I made every mistake that traders made. I don’t produce double-digit monthly gains (on most months) because I’m “good”. I came from a road full of disappointment, regret, and losses, and that paved the way for me to improve myself. I made the choice to become a professional trader long before I became one."



"Take the losses early on and learn from them. I like the whole blog idea or keeping a trading journal because it allows you to document what happens in the market and in yourself every day. If you don’t keep any record of some sort, then you are guaranteed to make the same mistakes over and over again. Keep a journal or writing in a blog should part of every trader’s after-hours review process."


"Improving yourself slowly bridges the gap between making trading a hobby vs. making trading a professional career and a business. It’s a process that develops over many years."


His public blog can be found here. Thanks Chart Addict!

Chart Addict's Wisdom

From Chart Addict's Blog on iBankCoin.com

Trading Plan/ Trading Rules

I like to ask myself several questions when constructing the plan. I’ll give you 20 of them here and you can brainstorm the rest.  The plan is your defense against emotional trading (if you actually follow it). Without a plan, you will be all over the place. The plan must be clear and concise and written down. If you do so, you’ll be in the top 3% of individuals who have a plan, immediately giving you an edge over the other 97%. Here are the questions (in no particular order):

1) WHY are you trading? - The simple answer is “to make money”, but that’s really not a specific answer that describes you. Perhaps I can change the emphasis: “why are YOU trading”? Every person has their own reasons, such as quitting their full-time job, spend more time with their kids, increase their quality of life, take control of their financial future, etc. Why are YOU trading?

2) How will you enter & exit trades? The best entries are when the trades that you put on are lower risk compared to a much higher reward. This requires a through understanding and rationale of WHY you enter the trades in the first place. You can exit trades in many ways, such as setting initial and secondary stops, trailing stops, scaling out of positions. Do what makes you the most comfortable.

3) What type of orders will you use? There is a vast array of orders. I like to use market orders 99% of the time. Others like limit orders, and of course, there are stop limit orders and trailing stop orders. Make sure you know when to use what.

4) What broker, software, hardware will you use? Compare brokers and see what you like. Don’t make the mistake of simply going to the cheapest broker. You get what you pay for. Instead, aim for a balance of reasonable fees, fast execution, excellent service, etc. You can choose what software and platform you want to use as well. Try out a couple. Finally, I’m not very knowledgeable in the hardware field, so just get a fast computer with lots of memory.

5) How much capital will you need to reach your goals? I think the absolute minimum to feel safe and without most restrictions is $25,000. To be adequately capitalized, I suggest a min. of $50,000. If you suffer a large drawdown in a small account, then you will have some problems. A larger account ensures flexibility and the ability for you to remain in the game, provided that you don’t go crazy in your trading. If you hold a smaller account, limit the downside risk.

6) What ARE your goals? This goes with #1. Make sure your goals are 1) written, 2) believable, 3)challenging, 4) measurable, 5) specific, and 6) with deadlines.

7) What’s your % allocation of capital per position? On average, I like to use 10% per position or side. Depending on my conviction level and the probability, I can go up to 20% per position and up to 100% per side (a rare occurrence). For people that are starting out, I’d say start with 5% per position, and move up as you build a tolerance. There are many ways to allocate capital.

8 ) What is your pre-market trading preparation process? This is your plan of action in the morning. You definitely want to check the futures in the morning for any gaps and their implications and location vs. the previous day’s close. I like to check different news outlets/sites (there are hundreds of links on the sidebar for you to explore). I also check analyst upgrades/downgrades, economic reports, and earnings reports that may move the market. Be aware of what’s happening.

9) What is your after-hours review process? Besides taking a nap sometimes, your end-of-day routine is key. Use this time to think about what happened during the day and what you did. It’s good to keep a journal or blog to record your thoughts and observations. Keep a daily log.

10) How many positions are you able to focus on at once? I personally do not like to have many positions open. 10 is the limit for me. Having a portfolio with dozens and dozens of positions will create a distraction and you may miss exit points. The good thing is that the more positions you have and capital allocated per position, then the risk level per position is minuscule. I prefer larger, concentrated positions initiated through directional timing.

11) What type of trader are you (day, swing, position, etc.)? If you don’t know this yet, then you shouldn’t even be trading at all. Know yourself. Figure out what style suits you the best. What is your psyche most comfortable with and able to tolerate. Just because I do “X” doesn’t mean X is appropriate for you. This is also why many people to follow other people become losers automatically by default.

12) Are you purely fundamental, technical or a hybrid of both? There is no wrong answer to this. It all depends on what you like and it’s your choice. I am 100% technical and could care less about fundamentals (except earnings).

13) What will you use (exch-listed, OTC, futures, options, etc.)? Again, your choice.

14) When will you trade (all day, set time, every few days, etc.)? This depends on your available time, schedule, strategy, and personal preference. If you set a certain time, don’t violate it. Commit to your scheduled and allotted time, or risk impulse trading.

15) What are your guidelines for using stops? This is your choice, but you have to adapt to market conditions when making your decision. Presently, wider stops are the norm due to high volatility constantly triggering tighter stops resulting in many losses. I personally do not use a hard stop unless I have to step out. I can use a mental stop and monitor the situation throughout the day. If you have a 9-5 full-time job, then you should use stops. Stop use is on a case-by-case basis.

16) What are your guidelines on losing positions? Specifically, how will you identify a serious loss vs. a temporary drawdown? How will you deal with the loss. Some traders simply stop trading for a few days to screw their head back on straight. This accompanies your strategy for exiting trades, but on the losing side. If you have 3 consecutive losses, seriously, take a break. Go ride some horses.

17) How much will you risk on every trade? Typically, a common rule is to risk no more than 2% per trade. Your risk depends on your allocation, exposure, and your loss limit. If you allocate 20% per position, you may risk up to 10% per position using th 2% rule. If you allocate 10% per position, you may risk up to 20% per position using the same rule.

18) Will you go both long and short? You should learn both skills. If you do not know how to short in a bear market, you will left with a severe disadvantage. Learn to take profits on both sides of the market. I recommend 4 main books on short selling (the first 2 are fundamental and the last 2 are technical): The Art of Short Selling by Kathryn Staley, Sold Short by Manuel Asensio, How to Make Money Selling Stocks Short by William O’Neil, and Sell & Sell Short by Dr. Alexander Elder. Get reading.

19) Are you going to trade the open? If the gap exceeds the high of the previous day after a day long consolidation, then the gap will run in the direction of the gap’s open. An area gap that opens within the previous day’s range is subject to fading/filling. What is your gap strategy? What is your strategy if the market opens unchanged?

20) Do you have a list of sites to visit, resources to read on a daily basis? If not, then check the sidebar for hundreds of links to every resource you need as a trader.

There are many more questions to ask yourself, but here are basics. Meditate on them.

 

4 Stages of Learning 

 

Back in mid-2008, I had a friend who lost over 60%. I offered to sit next to him for one afternoon while he was trading and I made sure he was free all day. This was in early September. I told him to initiate short positions and “leave them alone for a few days”. He closed out the positions within minutes. He started freaking out because a swing trade was going 5-6% against him.

I told him to re-add all the short positions. I then told him to come over to the window where a large metal pipe was running, and I handcuffed him. You can imagine how berserk he went, calling me all sorts of shit while at the same time feeling hopeless. I uncuffed him after the close. If you’re thinking “What the hell is Chart Addict doing with handcuffs in some dude’s room”, well, chill the fuck out and keep reading.

This is sort of extreme, but it’s also a personal experience. Many years ago, I used to handcuff myself during trading hours to avoid impulse trading and succumbing to my emotions. If I had to go to the bathroom or eat, I had to call my neighbor to unlock me. I did this for two full weeks and it was one of my most profound experiences in my trading career. Psychologically, I had no choice but to withstand the pain and I forced it upon myself like a madman.

Now that I have students, I can’t cuff them, but I tell them to completely walk away from the computer if they get urges. Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more. In fact, I could be eating a sandwich and watching Youtube videos while my gains fade away because I have my trade’s purpose and goal always in mind with the end result in focus. The psychological aspect of trading must be your foundation, for without it, you will not succeed as a trader.

It doesn’t matter what system you trade, what programs you use, or what you subscribe to in your search for the holy grail, or “THE” answer to trading. I found that keeping it simple was the best way for me. If you notice on my daily charts, I hardly ever use technical indicators and only rely on candle charting, price action, volume, and moving averages to make an informed decision. That is really all you need to find the best set-ups that produce highly successful and high probability trades with the greatest time value of employed capital.

I use the most unconventional methods in my trading as well. Many times, I do go 100% all-in, but in the best of circumstances. I believe I will be all-in this week, switched around from long then to short, mid-week. What I do may be risky, but I am so conditioned to take calculated risks that it is second nature to me. In addition, I don’t involve myself in conventional portfolio theory or asset allocation. That is a waste of time for my resources. I trade to get the biggest bang for my money in the shortest amount of time. I don’t fool around with 1-2% movers. That’s a waste of my day.

Everything I said above may or may not apply to you. What someone might do may not be appropriate for you and your tolerances. Most people are conservative and cannot or or are unwilling to employ the strategies that I use, all of which are 100% discretionary and technical and for some, proprietary. It is important for you to figure out what kind of trader you are, what your style is, how your personality fits, etc. This will not come overnight, but rather over months and maybe even years. You must know yourself before throwing your hard earned money in the market.

With that said, there are 4 stages of Learning:

• Stage I - Unconscious Incompetence: You have no idea what you know or don’t know.


• Stage II - Conscious Incompetence: You admit that you don’t know, and you want to know how.


• Stage III - Conscious Competence: You finally know how, but only if you think things through.


• Stage IV - Unconscious Competence: You fully know how and you instinctively take action.

During Stage I or Unconscious Incompetence, the trader doesn’t know what’s going on, and doesn’t know much about trading except for the fact that you could make millions! Also, these traders have no trading plan whatsoever. In fact, they don’t even know that they need one! Finally, the trader is unaware of the important aspect of trading psychology. We’ve all been here, done that.

During Stage II or Conscious Incompetence, the trader is all pumped up and excited about the potentials of trading. These traders look at charts all day long and flip through research reports. Finally, they open up a brokerage account anticipating great riches. This group probably reads 1 or 2 books, gets some kind of newsletter subscription, and they think they’re ready to run circles around the Market Makers. Not so fast. Unfortunately, these traders lose a lot of money and they realize that all the services and subscriptions and advice they got are no use to them This is also where the individual trader gets a taste of the emotions that come with trading (fear & greed).

This is also where traders test various strategies.  Stage II is especially difficult because the trader suffers disastrous losses and may become depressed or overwhelmed. His personal life may be severely affected. It is at this point that they decide to either move forward or quit trading. This is also where positive and negative judgments and thoughts are formed (”Am I too stupid to trade?, “Trading is too hard for me”). The trader has lost money, is afraid and confused, and has jumped into a financial and emotional abyss. You hear the statement, “90% of traders lose money”, right? This is the stage where it happens. Even if they can afford to take the financial losses, the psychological losses are excruciatingly painful for the new trader.

When the trader makes a conscious decision to take his losses and move forward, then they have reached Stage III or Conscious Competence. Usually, traders look into the abyss and somehow make it out alive. Whatever their motivation, they decided to pull themselves out. In the process, they have also accepted a few things:

• Trading is learned until the day you die. You never stop learning.


• Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading.


• Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.


• They cannot control the markets or “will” it to do whatever they want. More importantly, they accept that they don’t need to “control the markets” to become successful in trading.


• They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford’s gf’s house in Fredericksburg, VA.


• They must be psychologically prepared to trade.

Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:

• Create a trading plan. Goddammit. Would you start a business without a business plan? I didn’t think so.


• Test out the various strategies and see what “fits”. Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?


• Do not abandon any plans just because they don’t work. There’s always a time and place for everything in such a fluid market.


• Increase recognition and repetition. Practice, practice, and practice some more. Don’t bullshit yourself.


• Accept the fact that taking losses, is part of the game. If you don’t like losing, stop trading immediately. I mean it. You ‘ll thank me later.


• Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.

After a while, you’ll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the “trader’s intuition”, place trades without hesitation and finally, become consistently profitable, week after week, month after month.

Hope this helps some of you out there.

 

The Trading Death Spiral

This article is designed to be an add-on to my previous article on trading psychology. There was a lot of interest in the Four Stages of Learning, which can be applied to almost anything in life. I know this because a fellow bodybuilder told me so. This next article highlights what happens during Stage II and even Stage III. It is one of the darkest moments in a trader’s career. It’s a time where you either “make it or break it” and there is no in between.

What is the trading “death spiral”?

Imagine for a moment: You went short Friday morning (2/27) but the market immediately rallied from the open. Then, you decided to go long, only to see the market head back down. You just took 2 consecutive losses. In your eagerness to “make it back up” or “break even”, you start to get frustrated and have feelings of despair.

Later during the day, you see the market is about to breakdown, but you don’t go short because you’ve already been burned twice in the same day. Naturally, you would have made a killing if you took this trade. You then proceed to either literally or figuratively bash your head into the wall. Perhaps you even want to throw your computer out of your window. So you don’t wait any further, you then “chase” the stock and short it at ridiculously oversold levels and catch a furious bounce, forcing you to cover. There goes loss #3.

At this moment, you are dazed and confused as to what just happened in such a short period of time. You became poorer in a matter of minutes and you are feeling hopeless and you may even be experiencing shivers, shortness of breath, sweating, and of course you may be cussing and maybe even throwing objects across the room. Your choices are either 1) to calm yourself down and move on or 2) to quit, indefinitely. You are now in a death spiral.

You go through this shift or transition from accepting and embracing losses and correcting the mistakes, into a massive pit of emotions that becomes so convoluted and built up to a point where you lose total confidence and acceptance in anything and everything. This transition can occur within minutes, or even seconds. Emotional responses replace your tactical trading method and plan (if you even have one). The death spiral is simply you digging yourself deeper and deeper into this pit. It’s an abyss that you must get out of immediately. If not, you may experience permanent psychological damage that prevents you from trading ever again.

You must learn to control your emotions or you will not be able to trade. All the programs, books, people, and anything else out there will do you no good if you do not master your emotions. Do you understand that? What I am telling you is important. Even if quitting was the only viable choice, most traders that do quit do not do so until the death spiral causes an emotional response that creates a situation so desperate that the trader cannot take it anymore and must quit. You hear of stories about how traders commit suicide, right? Well, most likely, what I said above is the reason why. You want to be aware of your emotions and catch yourself before you visit the depths of hell.

Contrary to some people’s thinking, this doesn’t apply to only Stage II’s and III’s. This happens to everyone, even professionals, because we are all human beings. The difference between a pro and a novice is that the pro can quickly identify if he/she is entering the spiral and get out quickly and with only a scratch. A novice has no clue what he/she is getting him/herself into, and as a result, suffers massive losses. You can read my pretty little charts all day long, but they won’t save you once you spiral out of control. Your emotions take full control over you as if you were possessed by a demon. You become irrational.

Consider a few a things:

• The first time a spiral happens, you should correct and learn from it. The most important skill you can master here is to control yourself before the spiral controls you. However, every time this spiral occurs and the more you go out of control, the quicker and more devastating the next spiral(s) will be. You will lose control even faster. The pain will shut you down and you will no longer be willing to trade anymore. Correct the problem now.

• Instead of quitting, take the time to re-build your confidence and to strengthen your emotional resolve. Quitting is taking the easy road. It is the most convenient thing to do because you don’t want to get burned again. You know the story about the little boy touching a hot stove, right? Or how about the one that got bitten by a dog? Quitting doesn’t provide any solution, and will only feed your reservoir of painful thoughts.

• How many traders start the day winning, only to lose those gains (plus more) at the end of the day? Who’s fault is it, the market or the trader? Did the market change or did the trader change? It’s always the traders fault and the trader always changes. You NEVER blame the market under any circumstance. The emotions start coming in before the trader even starts to lose. Excitement from winning will cause the trader to lose control. The gains turn into losses. You have started another version of the death spiral.

How do you stop yourself? The key is self-awareness. You have to be aware of what you are doing. How many times have you spiraled out of control and only at the end of the day did you realized what you have done? Would it not be better if you caught yourself in the beginning and knew what you were doing and what the consequences would be if you do not stop? The moment you transition from self-unawareness to self-awareness, you will have broken through a major point in your trading career. It is a pivotal moment.

Let’s become self-aware right now. Get an index card and write the following statements on it:

• After consecutive losses, I may be losing control of my emotions


• Many consecutive losses usually result from trading within neutral ranges or doji days, such as 2/26*.


• Are you following your trading method or are you overtrading?


• Trading method losses are acceptable. All other losses are not.


• If unsure about the market, remain neutral. Making no money is better than losing money.

(*Note: I even stated on Twitter early Friday that the day presented no sustainable trading opportunities, therefore I did not place a single trade. Pay attention).

I’m sure you get the idea, and I know that there are more statements that could be added. I will welcome suggestions in the comments section for traders who need them. The card means nothing if you don’t use it. Go ahead and tape it to the bottom of your monitor. Don’t leave it on your desk as it tends to be swept aside. This visual reminder will help you more than you can imagine.

Now, get another card, and label it as “Symptoms of a Death Spiral”. I am not bullshitting you. Now, write the following:

• Self-unawareness may lead to “shortness of breath”, “sweating”, “squirming in your chair”, “nervousness/anxiety attacks”, “shaking/restlessness”, “feelings of hopelessness”, “confusion”, and finally, “anger”.


• When I reach the “anger” stage of the death spiral, I may “cuss” (more than you would on a normal day), “scream”, “throw objects”, “break objects”, “jump up and down”, “bang my head into the wall”, “kick myself repeatedly”, “direct anger towards other people” (who have nothing to do with trading), “lose full normal emotional function”.

Again, you may add a few things on that list as well. If you have ideas, leave it as a comment for others who need it. Now tape this card next to the first card. The purpose of the first card is to help prevent you from digging yourself deeper into the hole. The second card is there to remind you that if you do not follow the first card, you will experience the things written on that second card. I know you don’t want to, so follow the first card. Read this everyday before the market opens. In fact, print this entire article out and read it everyday if it helps you.

If you are in a death spiral or have recently experienced one, then you may want to do the following:

• Stop trading immediately. You cannot trade when your emotions have you under control. Go exercise, read a book, play with the dog, do something to clear your head.


• You may want to start paper trading until you become profitable on paper. I tell people all the time, “If you can’t make fake money, how in the hell are you going to make real money”? Makes sense, doesn’t it? Get your trading methodology in order.


• Start trading again, but only in small lots. If you used 10% per allocation, then start off with something smaller. The less money that you have at stake, the less emotional you’ll become. If you had $2,500 at stake, then you wouldn’t care much if your normal position sizes are $10,000. The death spiral will come after you the moment you try to make an “unplanned killing” motivated by your own greed.


• As you become more comfortable, gain more confidence, and start turning a profit, then you may increase your position sizes.


• Don’t forget this article and the two index cards. Read them daily in your trading.

I want to mention the importance of remaining neutral to single events, and that includes winning. If you get really fired up and over-the-edge excited when you make money, I mean jumping and down and calling up your friends and telling them how much of a genius you are, then you are 100% susceptible to the death spiral. In fact, you are more likely to go down the spiral faster than a non-excited trader. If you want to start trading for a living, then you have to act in a professional manner. Since most individual traders trade alone, it’s easier to “act out” on emotions, but imagine if your mother or your kids or girlfriend/wife, whatever, was in the room with you, how would you act?

I hope this helps you all. Have a great weekend!

The Trader's Mindset

As you know by now, psychology is a secondary interest of mine, after reading charts and tarot cards, of course. For this week, I decided to cover the “trader’s mindset” and the most common psychological issues that all traders deal with.

How does someone know that they reached the trader’s mindset? Here are a few characteristics:

1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market’s direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions

Developing the trader’s mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.

Let’s take 100 traders using the same trading system or approach. It is highly likely that no two of them will trade it exactly the same way in all aspects. Why is this? Because our mindsets, beliefs, and understandings are unique. It is no surprise that most traders fail and the reason why is because they lack the trader’s mindset. This article covers those in Stage III and IV within the 4 Stages of Learning. More importantly, it applies to those that survived Stage II.

There are two parts to fixing any psychological problems:

1. Recognizing that it exists
2. Accepting it so you can move on

In trading, this is where it’s so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don’t recognize and accept a problem, then you won’t get anywhere!

What are some of these issues that I speak of? Here are a few along with their causes and/or effects:

1. Anger over a losing trade - Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.

2. Trading too much - Traders that do this have some personal need to “conquer” the market. The sole motivation here is greed and about “getting even” with the market. It is impossible to get “even” with the market.

3. Trading the wrong size - Traders ignore or don’t recognize the risk of each trade or do not understand money management. There is no personal responsibility here.

4. PMSing after the day is over - Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome.

5. Using money you can’t afford to lose - Usually, a trader is pinning his/her last hopes to make money. Traders fear “losing” the “last best opportunity”. Self-discipline is quickly forgotten but the power of greed drives them, usually over a cliff.

6. Wishing, hoping, or praying - Do this in church, but leave this out of the market. Traders do not take control of their trades and cannot accept the present reality of what’s happening in the market.

7. Getting high after a huge win - These traders tie their self-worth to their success in the markets or by the value of their account. Usually, these folks have an unrealistic feeling of being “in control” of the markets. A huge loss usually sobers them up pretty quickly.

8. Adding to a losing position - Also known as doubling, tripling, quadrupling down, typically, this means that the trader does not want to admit the trade is wrong. The trader’s ego is at stake and #6 comes into effect as the trader is hoping the markets will “work in their favor”.

9. Compulsive trading - Similar to #2, except these traders have an addiction to trading and quite possibly gambling issues. They need to constantly be trading, even if there is no rational reason to do so. They are always excited whether they win or lose.

10. Afraid of “pulling the trigger” - This usually means that the trader does not have a system or approach already in place. They have not calculated risk/reward and many times, these trades are unplanned. This also comes after a string of losses. They don’t want to be “wrong again”. There is no trust from within.

11. Over-thinking or second guessing - Similar to #10, but these people are usually looking for a “sure thing”, when they clearly don’t exist. Losing is not recognized a normal part of trading and the risks and unknowns of trading are not fully accepted.

12. Limiting profit or getting out too early - These traders have poor self-esteem. This is a direct effect of believing that the profits were undeserved. Usually a trader is stressed over a trade for some reason and closing the position quickly eliminates the anxiety. Usually, there is a fear of “giving back” those gains.

13. Fear of being stopped out - Traders fear failure and the pain from taking losses is great. Here is another instance where the ego is at risk. They must always be correct or suffer a feeling of “let down”.

14. Not following your system - This is a trust and follow-through issue. Perhaps the trader didn’t test it enough, or it recently produced a string of losses, casing some doubt. Your faith in the system is broken. Not only do you not trust the system, you can’t even trust yourself with picking one that works for you.

15. Following other traders (indiscriminately) - These traders do not have a system. They are also limited in trading knowledge. They feel that they will become winners if they simply “follow” someone. These trades are usually impulsive.

The key to all things is creating balance. This means that if you are winning or losing, you should not care. When you finally recognize and accept each of these common pitfalls, you’ll be well on your way to acquiring the trader’s mindset. Good luck.