How to read a trading book

Do you expect to become a doctor, just by reading a book, or dozens of books? Or do you think that a doctor needs practice, needs to think about what he’s learning? Reading books is a very important step in becoming a better trader, but that’s not enough! You will not certainly become a successful trader just by reading 20 books, even if they are very well written books by the authors who actually make money by trading.

Reading from cover to cover

A lot of us believe that, by reading a trading book from cover to cover, we will get all the necessary information for trading profitably the method that is described in the book. But this is almost never true, because there will be a big difference between how we see the things and how the author of the book sees them. This way he may omit some information, because it may seem too obvious for him; surely it will not be for us, so we will have a lot of doubts. In the end we may understand a completely different thing. So reading from cover to cover, like reading a novel, without thinking about what we read, it’s not the best way to read a trading book. This may be good only in the very beginning phases, even before getting in front of the charts, for getting some general information about trading.

Reading from cover to cover creates a chaos

What do we have in our mind after reading a trading book with a bunch of information, describing a lot of indicators and chart patterns? For sure it’s a chaos. That will not be structured information. And what we usually do after finishing reading a book? We take a look at the chart and we try to find the patterns we’ve learned, but at this point we still can’t put everything together, so we will “adapt” the situation to make it to fit the pattern, and we will see only the profitable trades.

The best way to read a trading book

I think that the best way to read trading books is to read it slowly and to test suddenly the concepts we learn. We should test only one thing at a time, we just don’t have to worry about the profit at this point. It’s important to understand and to be able to apply the new concepts that we have just learned. If we have some doubts or some ideas on how to improve what we’ve learned so far, we should write that down. We should write down questions, like: “Where do I place the stop-loss?”, “Where do I take profits?”, “When should I trade?”, “How do I filter this stuff?” and so on. When we are done with the questions, we should try to answer them and to think what the solutions may be. When done with these, we can continue to read and to try to see if the author answers our questions. And when we’ve got some new information, we do the same thing. After doing it, we should try to link it to the information we’ve tested before. Believe me that this method of reading a book is better than reading ten books from cover to cover and then trying to test everything.

Conclusion

Don’t think that if you will read a trading book from the beginning to the end, you will understand the things better, and it will help you to structure the information. For structuring the information you need practice. By practicing you will see real chart situations and it will make you think, maybe this way when you will continue reading you will understand better what the author actually wanted to say.

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Posted in Newbie Traders, Trading Tips

Self-control

A very important thing when we are trading is the self-control. When we have it we will not to jump into the market when we see that it’s moving fast, without us. We will not try to have a trade at any cost; we will be there to make money, and not to make more trades. But as soon as we lose it, we have to run away from our trading computers, because in these cases we become our worst enemies.

My personal experience

On lower timeframes it’s easy to break the trading rules and get out of the control, especially when the volatility is high. The last week I was trading Crude Oil on a 3 minutes chart. I saw a signal and I was waiting for the bar to close and then to put the order. After the close, the price went down about 3 ticks below where I had to put the order, a second later it went up for ten ticks. There were other 6 six tics to the price I would place the stop loss. At that point I thought that it was great that I didn’t manage to get in the trade, but I was still thinking if I had to put the order, because the stop loss wouldn’t have been hit and the profit target also. The price dropped suddenly and I didn’t manage to put the order. If I put the order I would had a profitable trade.

I should learn the lesson. When I see a signal I have to act suddenly, I don’t have to think, because in the end it doesn’t matter if I would have a losing trade or a winner.

After that untaken trade, I lost the self-control; I was looking for a trade. I was feeling bad because I didn’t make $100 because I made a mistake. I was ready to break the rules just to have a trade, I forgot about the fact that I was there to make money; actually I was thinking that every trade would become profitable. I was feeling like the market owed me $100. At that point I decided that it was better to close the trading platform and to relax.

Solution

The first thing to do when we lose the self-control is to close the trading platform and to relax, before doing some disaster, just stay away from the trading computer. There will be other days with other opportunities of trading. There is no reason to stay there like it was the last day of trading.

It’s hard to achieve self-control when you are not in a good shape, for example after an argument or just because we have a day when we think we will not become successful. I usually don’t trade if I have such days, I rather go to the gym and when I’m getting back I try to read my trading journal and try to analyze how I was feeling when I was making winning trades. These help me to regain my self-control. Remember that we make the best trades when we are in a good shape and when we are concentrated on what we are doing.

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Posted in Trading Discipline

The first trade VS the first dance competition

Last weekend I had my first ballroom dance competition after a lot of hard work, and it remembered me the time when I had my first trade. Actually it remembered me the first trade in FOREX and the first trade in Futures, even if what I felt when I took the two trades, was slightly different.

They have something in common anyway – the unknown, you don’t know what to expect, and if someone says that you will win, you believe them, because you don’t have your own experience, so you can’t form your opinion based on the experience. This also explains why newbie traders often change the trading system. For some people the unknown may create some kind of fear. That’s why it might be difficult to put on the first trade.

My teacher of ballroom dancing said that I was brave, but I didn’t feel ready for the competition, maybe because previously I saw how other dancers performed. I thought that I needed more practice, in order to be able to compete. But my teacher said that I had to participate at the competition, and he didn’t accept excuses.

The first trade in FOREX

When I opened the first trade on FOREX there was more curiosity, there was little fear, I believed that it’s impossible to lose. I was concerned more about my broker. I was wondering why he was organizing courses and why he explained me everything. I was asking myself why he was not trading if it was possible to make so much money by doing it. But after overcoming the doubts about why the broker I just needed confirmation that it was possible to win in the FOREX market. I was afraid that on the real account there would be something different from the demo account. After making my first dollar I firmly believed that it was possible to make money by trading. I believed that the first trade was the most difficult thing; I didn’t know that the most difficult things were yet to come.

The first trade in FUTURES

It was similar with the first trade on futures. I had a real account with a futures broker. And I was always analyzing the charts, trying to apply what the master trader taught me, sometimes I was making . But as I wasn’t seeing the expected results, I didn’t want to trade the live account. I believed that in the future would become brave, so I would trade later. But at some point my broker changed the rules, so I had to make at least 5 trades a month in order to have the free data feed. And when they took money from my trading account I decided that I had to trade, especially after the second month. So after testing a while, I discovered a method that was giving a positive expectancy. But I was really afraid to put on the first trade. First of all because the risk per pip wasn’t $1 like in my first trade on FOREX, but it was $10. The second thing that concerned me was the slippage, because everybody was talking about it, especially the FOREX brokers were emphasizing the fact that in FOREX you don’t have slippage like in Futures. After the first trade it became easier to take other trades, I was filled at the price I wanted and the execution was fast, because I trade when there is a good liquidity in the market.

Conclusion

If you did your homework, so you’ve tested your trading system, you shouldn’t fear to open a trade if you see a signal. It might be difficult, but after doing it a couple of times it will get easier, especially if you see that you are rewarded for following your trading rules.

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Losses are important, if you can learn from them

From the beginning of my trading career till recently I was really afraid to take a loss, I was breaking my rules and I was taking the profits too early just to have a winner trade. Sometimes I didn’t take a trade because I was thinking it would become a losing trade.

Fortunately from the early stages I understood that it’s important to enter the market only when your trading plan says to do so, maybe because everybody was talking about the entry point, nobody was talking about exiting a trade, so unfortunately I didn’t learn the same think about the exits.

I knew that it was impossible to trade without having losing trades. I knew that losers were an inevitable part of the trading, but anyway I was trying to avoid losing trades (so I wasn’t getting enough profit). My results were not as good as I was expecting.

When I understood that exiting a trade is as import as entering it, thanks to my trading journal, my results started to improve. I’m not saying that we should like the losing trades, but we shouldn’t try to avoid them.

It’s true not only in trading

Let’s say you broke your trading rules and you took a trade that you shouldn’t have taken and you had a winner. You would be happy and probably you wouldn’t try to analyze the setup or to test it to see how it was behaving in the past. But a loss will make you to think more about a certain setup, because it’s painful. You’ll probably try to find how the same setup behaved in other situations.

But this is true not only in trading, it happens everywhere, after having a loss we start to think if it can be avoided in the future. We start to analyze our behavior, we try to analyze if we did something wrong. We begin to understand that maybe we should pay more attention to certain things.

Let’s say someone that had a lot of money with him was robbed. I’m sure he would be more careful in the future, maybe he will decide not take so much money with him.

I can give countless examples of how we can learn from a loss, but I think you have already understood the concept.

The lose that made me think about the rules

This week I had setup and as the price was moving too fast I didn’t manage to put the stop limit order for entering the market so I put the limit order, because the price hadn’t reached my profit target yet. The price turned back and I was filled and by the time put the stop and limit orders I had to exit, because of the time stop I use. As I was hurrying I thought that it was time to close the trade, but after clicking on the Close button I realized that I should have done this after 20 second, I just didn’t see very well the counter down timer.

I lost $20 on that trade, instead of winning $50, if I would close the trade at the right time. I didn’t pay very much for the lesson I’ve learned. I should review my trading plan and set a minimum timeframe. On the lower timeframes it’s really easy to make mistakes.

Conclusions

It’s important to accept that losses are part of our trading career. There are traders who call them costs of the trading. We can call them whatever we want, but we should not try to avoid them, when we have them we must try to learn something new instead.

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Don’t get used to be unsuccessful

If it’s a while you’ve been learning to trade and you aren’t yet successful, you might think that it’s impossible to become a master trader. But it’s the same in any other activity, because it’s easier to say that it’s impossible to do something, rather than committing to achieve it. A person, who’s trying to lose weight, may give up after a month or two, because he or she doesn’t have the right expectations. As the vendors of methods to lose fat promise great results in short time, vendors of trading systems promise getting rich easily and quickly. You may go to the gym, but if you eat more, you will not see improvements.

The correct mindset

After trying several systems, that didn’t give you the expected result, it’s really difficult to think that the next book you will read or the next trading method you will try will be different. You may still go ahead and try them, but if you don’t have the right mindset, it’s really difficult. You will simply ignore the information that is in conflict with your beliefs. So, if you believe that it’s impossible to become a successful trader, how do you think will become one. You will try to sabotage yourself, so you might not see a lot of precious information that might be in the trading book.

My recent experience

Recently I was working on a task that was really hard to accomplish. I have been working on that activity for about three weeks. I was ready to give up, but I continued to work. And at the beginning of the third week I felt like I wouldn’t be able to solve it, but I said that I should solve it no matter what; I also set a time limit. So I started again with the right mindset and this time I managed to solve the problem.

I associated this process with the learning process of becoming a trader. I remember at the beginning I was very confident that I would become a successful trader. I believed that all I needed was to read a couple of books that I read with a great enthusiasm. Before starting the task, I believed that it was enough of add a couple of lines of code to solve the problem.

After series of loses, even if I had lost my enthusiasm, I continued to read books. But actually I knew that I wouldn’t become successful from reading another book. The same thing here, I was trying different solutions, and the things got more complicated. At a certain point I thought that it was impossible and if I found someone on the Internet affirming that it was impossible, I was feeling good, because I wasn’t alone.

Later I realized that I need a different approach in order to become a successful trader. I realized that I can’t rely on someone that will teach me exactly how to trade. I realized that I had to test by myself what worked for me and I had to work to improve my trading method and my discipline using the trading journal.

Conclusion

As soon as you realize that you are learning something new about trading, but you firmly believe that it’s impossible to become a successful trader, you should stop and start to thing in a different way. First of all you should change this belief and then start again with the right expectations. You should be convinced that you will succeed. And remember that you will need a lot of time to become successful. Trading is not something that will make you rich quick.

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After series of winners it might be difficult to put on the next trade

It’s known that after series of loses it might be difficult to put on the next trade, because you may doubt your trading system. Did you ever think that it also can be true after series of winning trades? Actually it sounds a little bit strange, doesn’t it? Because usually when you make series of winning trades you might believe that it’s impossible to lose, so usually you can even break your rules when putting on the next trade, because you got used to win.

After a couple of consecutive winners I was trying to avoid taking a trade

This week, after series of winning trades I was trying to avoid trading, I wanted to keep the profit I made, but actually I didn’t want to withdraw it, I just wanted to keep it on my trading account. The reason I was doing it was because I knew that having losers was part of the trading. And I also understood the fact that the probability to win any single trade is ½. But when I was in front of the computer looking at the charts I was thinking differently. I believed that as I had series of winning trades, it was time to have a losing trade and the probability of having it was bigger. Now during the weekend, when I analyze my behavior during this trading week I understand that this is not true, but for some strange reason when I was trading I was thinking differently. I don’t know what would happen if I saw a clear setup, maybe I would have taken it despite the fact that I was afraid.

Solutions

I think in this cases, a good idea might be to consult with a trader’s coach, because there can be plenty of reasons why one is sabotaging himself. Maybe one is afraid to be successful? Anyway if you are in the same situation and you don’t want to consult with a specialist at this point try to do the following things:

  • Try to make a picture in your mind about how you felt when you took that series of winners; you can use your trading journal for helping you in doing this. Try to think how you were rewarded for following your trading plan.
  • Think that you thought the same way a before and you didn’t take the last couple of winners you would have less money in your account. The next trades can also be winners.
  • Consider that if you will not follow your trading plan you will not achieve the expected results.
  • Keep in mind that the next signal has nothing to do with the previous signals and you should only concentrate on series of trades and not on the every single trade.

I was thinking about all these, and I have to admit that I feel ready for the tomorrow’s trading session. I feel that I will take the signal as soon as it will present itself. If you had the same problem and managed to solve it, please share how you managed to solve it.

Conclusions

We should follow our trading plan and shouldn’t try to get different results by not following it. As we tested our trading method at least we know what to expect, but if we don’t follow it, probably on the long run we will not have a better result.

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Start following your trading plan and it will be easier to continue

If you give to a newbie a tested trading system that is making money, do you think he would succeed? My opinion is that he wouldn’t, because after a couple of losing trades, it will be difficult for a beginner trader to continue following the trading plan. He will start to skip trades and to break the exit rules. Remember that exiting a trade is as important as entering it. It will be easier for a newbie to look for another trading system; here is why the newbie traders change the trading system so often.

The first trade on the new trading account

I don’t know why, but we want our first trade to be winning trade. It happened to me with all the trading accounts that I opened; I always wanted the first trade on the trading account to be a winning trade. I asked other traders and they also wanted the same thing, but why? Maybe we desire it, because we want to enforce our belief that it’s possible to make money by trading? But by not following our rules on the first trade, we are enforcing our belief that not following the rules helps to make money.

When you don’t follow the trading plan, you say “Let’s take this smaller profit this time, but the next time I will start to follow my plan”. It’s like saying that you are smoking the last cigarette, or eating the last piece of cake before starting a diet. It’s like saying that you will follow your rules, when the trading account will be bigger. That because it doesn’t hurt so much to lose the money you made by trading, compared to losing the money you’ve worked hard for. So maybe that’s the real reason why we want our very first trade or the first couple of trades to bring profit? So we can risk the money that we’ve made by trading.

My recent experience

This recent experience reinforced my belief regarding the importance of following the trading plan. It has been a while that I’m trying to follow my rules. By now I’ve managed to almost follow the rules on my last 10 trades. I’m saying almost because I wasn’t sure about a couple of signals, but I took the trades anyway. I have to learn that when I’m not sure about a signal I shouldn’t trade it. After being filled I followed my trade management rules, so that’s why I say that I’ve almost followed the rules. The last week I had two trades on Euro futures contract and on the first trade I made $100. I have to admit that I was tempted to close it earlier, so I would have made less than hundred dollars. After closing it I was happy because I was reworded for following my rules. The next day I had another trade on 6E futures contract. This time the price was moving slowly around my entry point and then it started to move against me. For a moment I thought to close it when I was losing $75, I wanted to add new rules to my trading plan while I was in a trade. But suddenly I realized that it’s not wise to do that, so I followed my rules and I closed the trade using a time stop. I lost only $12.5. In the last two trades I made $87.5. These two trades reinforced my belief that following the trading plan is very important. If I closed the first trade with $50 profit and the second trade with a $75 loss, I would lose 25$ instead of making $87.5.

Conclusions

Don’t think trading being a lottery, if you make money on the trade you are in, doesn’t mean you will be able to retire. If you don’t have confidence in your trading method, you should build it. Then think that you’ve spent a lot of time to test your system or to find it. If you don’t follow your rules you just waste your time testing the trading system. Try to follow your trading plan on a couple of trades (the number of trades depends on your trading method) and you will see that it’s easier to continue following it when you see that you are rewarded for doing so.

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If you found a good system, it doesn’t mean you are already successful

Most of the beginner traders are convinced that all they need, in order to become successful, is to find a good trading strategy. I think this is an important part, but as soon as you will find one, you will realize that it wasn’t the only thing you needed. So it’s important to start working on your discipline as soon as you come to trading.

Choose the strategy that fits you, not that makes more pips

When it comes to choosing what the right strategy works for you, first of all you should have the right expectations; you shouldn’t expect to make it a living trading. When you are not expecting unrealistic profits you can concentrate on picking the strategy that fits your style. I’m not going to tell you that you should search a system that fits your lifestyle, because you can find this in a plenty of articles on the internet. And it’s also obvious that if you are working full time, a day trading strategy won’t be for you.

I’m going to talk about those marketing tricks that you should beware when buying a trading a trading system.

The secrets that are used by the vendors of the trading systems

When you see that a vendor affirms something like “my system is making 6000 pips a month” or “my setups give 80% of winning trades”, you should ask him further questions to see if his method fits you.

Once I asked a vendor, how he can manage to make so many pips. He replayed that he was opening a trade and if he closed 1/3 of the position at the first target of 40 ticks and the second 1/3 of the position at 60 ticks and the last part of the position at 100 ticks, he would count it as 200 pips. But of course if the trade went against him and he was stopped out at -100 ticks, he wouldn’t consider losing 300 ticks but only 100. So after one winning trade and one losing trade he made 100 pips (200 of the first trade and -100 of the second). But let’s assume he was trading three contracts on both trades, so he made $400 + $600 + $1000 = $2000 on the first trade. He was doing great, huh? On the second trade he lost 100 pips, but he did it with all three contracts, so the amount he lost was $30 * 100 = $3000. So actually in these two trades he lost $1000 and didn’t make 100 pips.

Do you still believe that you would make $60,000 a month, trading just one contract, using the system of the guy that affirms his method is making six thousand pips a month?

Now let’s reveal the secret of winning 80% of the time. It is easy to sell a method if you say that it’s winning 80% of the time, so some of the system vendors use it as a marketing message. But you should ask what the profit/risk ratio is. Because if it’s at least one that’s great, but if it is 1/3, that’s easy, you can do it yourself. You can achieve this by opening arbitrary positions and putting the stop loss at 90 ticks and the take profit at 30. But, would you make money using that method? The answer is simple – No!

Maybe the vendor himself, which is a master trader, is able to win 80% of the time, but it’s not because he’s following his strategy, it’s because he has a lot of experience and the intuition is helping him in his trading.

Conclusion

When you search a trading system, ask the vendor more details about the trading method and how much time a day would you need to trade it. Ask more details about the risk/reward ratio and how big the stop is, to see if the risk is compatible with your risk tolerance. If it is a system for the FOREX market you shouldn’t have to worry about this, because you can open a micro trading account. Once you found the trading method that fits you, stick with it. Don’t change the method just because you think that other methods are better.

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Posted in Newbie Traders, Trading Discipline, Trading Tips

Placing the stop loss ahead of time

As you might already know, it’s very important to calculate the risk of the trade ahead of time. You shouldn’t even enter the trade if you don’t know what the risk of entering that trade is. It’s also very important to put automatic orders instead of closing the trade manually when you see the stop loss hit. It’s better for different reasons that might cause your loss to become far bigger the amount you wanted to rick:

  • The price might pass very quickly thought the stop loss that you mentally set and you might not be able to close it at the desired price.
  • When you see that the price is near your mentally set stop loss you may think that you would rather give the trade more room or more time.
  • You may lose your internet connection and the price might go far beyond the price you wanted quit the trade.

My recent experience

I’ve already learned the lesson about setting the stop loss and I don’t even imagine having an order in the market without protecting it with a stop loss. I’ve almost forgotten about how hard it is to close a losing trade. But it happened to me yesterday, I’ve experienced once again the difficulties of pulling the trigger for closing a losing trade.

In my trading, along with the pips stop I also use a time stop. The trade I was in, didn’t touch nor the profit target nor to the stop loss and when the time that I give the trade expired, I closed it with a small loss. But a couple of seconds before I was supposed to close the trade a lot of thoughts came to my mind. I was thinking to give it more time, hoping that it might go in my direction. But suddenly I thought that I should follow my trading plan and that the fact that this trade will be a winner will change nothing in my trading career. So I closed it on the time, as my trading plan dictates. The next couple of seconds, after closing the trade, the price went in my direction. If I closed it later I would have had an even smaller loss. But if I had a smaller loss I would create a bias that not closing the trades on time is good. It’s not one trade that will make us successful traders, following our trading plan will make us successful traders. I proudly had written in my trading journal, how I managed to follow the rules and all my thoughts in the moment before closing the trade.

A tip on how to overcome emotions when closing the trade using a time stop

A lot of times when I closed the trade because the time I give it expired, I was trying to get the better price. But how can I know what the better price is if I don’t know where the price will go in the next 10 seconds? It happened to me other times, because I thought that it would go in the opposite direction, I closed the trade 10 or 20 seconds before I was supposed to do so. But that times the price actually went in my direction and I would get a bigger profit, if I followed my trading plan. This time I wasn’t looking at the profit but only at the time, so it helped me to follow my trading rules. I hope this can help you too. When it’s time to close the trade using a time stop, don’t look at the profit, because you might be tempted to close it prematurely or to give it more time. Instead, look only at the time. You can read more about the time stops on babypips.com

Conclusion

It’s very important that you set the stop, because if you don’t set it, you may watch the market and decide to give the trade more room. If you set the stop loss ahead of time you accept the risk, and you feel that your position is protected.

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Posted in Trading Discipline, Trading Plan, Trading Tips