Archive for ‘trading’

FibGrid: It Even Converted this Hardened Skeptic

By , 23 December, 2010, No Comment

If you have read even a smattering of my articles about technical trading you will know that I am skeptical of just about every technical trading technique. I have been vocal in my criticism, often to the point of sarcasm. I have labeled chart formations pure bunk, poked fun at the Elliot Waves theorists, and howled at anything resembling Gann lines, Andrew’s Pitchfork and a host of other exotic sounding technical tools. In short, I have little use for most aspects of technical analysis. Then I became acquainted with FibGrid.

I have a friend with whom I often spend time trading, David Palmer, and he uses a wide range of technical analysis tools. Needless to say, I have a field day poking fun at the endless array of odd looking lines and random chicken scratching that adorn his chart. I am sure he must tire of my endless criticism, as my needling can sometimes border on being cruel. Just the same, we continue to trade together as I have a tremendous amount of respect for his integrity and work ethic. To make matters worse, he is always trying to cajole me into giving his technical tools a try, which I generally dismiss as something akin to practicing witchcraft. Now that I think about it, I have no idea why he puts up with me; but we continue to actively trade together and I genuinely enjoy his company.

One of his favorite topics is the use of a program called FibGrid. For months I dismissed this arcane sounding program as another over-hyped tool of dubious distinction. I refused to use the program on both ethical and philosophical grounds. As a testament to David’s tenaciousness, he finally got me to install the program on one of my minor charts “just to prove him wrong, once and for all.”

Note to readers: I hate it when I am wrong about any aspect of my trading style, which is constantly evolving, and the remaining portion of this article is a frank admission that FibGrid has made my view of technical trading a bit cloudy.

I had a chance to discuss the rationale behind the functioning of FibGrid with its designer David Starr. I have to admit I was impressed with the range of knowledge Mr. Starr possessed about trading, practical application for using the Fibonacci sequence, and his grasp of the history of trading. I have to admit that the guy actually made sense, which I consider unusual for traders purveying anything having to do with technical trading or technical trading indicators.

To make a long story short, I started using FibGrid and the darn thing opened my eyes wide. In the case of e-mini trading, the Fibonacci lines generated by the program date back nearly a decade and are color coded in a hierarchy of importance.

Still, I had not traded with the program and even though the theory sound plausible, I remained unconvinced that it would work in practice.

I decided to put the program to the test, and started using FibGrid in my well attended trading room…in front of some seasoned and knowledgeable e-mini traders. I expected the program to flop miserably and I could relegate the software to a pile of other worthless software have accumulated over the years.

Then something went horribly wrong, tragically amiss, shockingly awry.

The darn program worked. Not only did the program work, it worked with amazing accuracy; and the more I used and understood the program, the more accurate it became. In short, FibGrid started to consistently add cash to my bottom line. A technical program had proven itself worthy to grace my chart and my world had been turned upside down.

Gradually, I began to integrate the FibGrid lines into my well established methodology and have significantly increased my bottom line profit. To be sure, the program has made a significant dent in my profit margin and it only gets better as I learn the nuances of the program.

Who would have thought that this curmudgeon price action trader could learn something from technical analysis? From the onset, let me say that it wasn’t me…I started using the program only to prove it was a sham, like all of the other technical analysis programs I have sampled.

Want proof?

Sign up for a free week in my trading room and watch me integrate FibGrid into my existing methodology. I will begrudgingly admit….it works like a charm and you are leaving good trades and a significant amount of money on the table if you aren’t using FibGrid.

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What is the Market Going to do Today?

By , 3 December, 2010, No Comment

I am invariably asked this question as I begin each day in the trading room.  Will the market go up?  Will the market go down?  There is a gap up…does that mean the market is going to fill the gap immediately or maybe wait until later in the day?  I almost always disappoint the individual asking the question by answering, “I really don’t know.”

Even worse, I really do not know.

Predicting which direction the market will move can be one of the most embarrassing propositions for any trader to undertake.  Of course, you have at least a 50% chance of being right, which is some consolation. Generally speaking, though, I don’t have the slightest idea which way the market will move, and many find this disturbing.  As a trader, many think you ought to have some general idea as to which direction will move.  But I am a scalper, and I don’t concern myself with predicting which way the market will move.

I am looking to catch areas of momentum and ride that momentum until it subsides.  Instead of knowing which way the market is going to move, I am simply hitchhiking a ride as the market moves in one direction or the other. I am quite comfortable reacting to the market as oppose to predicting what the market might do.

Scalpers use a number of techniques to identify areas of potential momentum.  First and foremost, most useful information is contained in the actual price action in the market.  Oddly enough, price movement is often ignored in favor of a variety of oscillators, rate of change indicators and a number of exotic charting systems.  I am not interested in many of the popular predictive systems like Elliot Wave analysis, Gann Lines, or systems of a similar ilk, but I want to make sure I point out that my opinion does not imply these systems do not work.  My point is a simple one, these systems do not work for me and I do not use them.

No, I am far more interesting in support and resistance, trend lines and momentum.  I have an important maxim: Trade primarily with the trend. I allow myself one countertrend trade per day, and that is usually one too many; but there are many very enticing set ups that occur countertrend and learning to lay off these trades is a challenging job.  Most traders find that countertrend trading is an unprofitable method in which to trade.  Further, the empirical scientific evidence bears out one indisputable fact; trading against the trend is far less profitable than trading with the trend.  For a scalper, trading with the trend the majority of the time is imperative.

I also employ, in varying degrees, forms of Fibonacci analysis.  I have never been convinced that the underlying principle of Fibonacci is valid; that is, the market moves in natural cycles that can be predicted using the Fibonacci sequence.  One thing I know for sure is that enough people trade using Fibonacci analysis that the system works.  Whether Fibonacci works because so many people use it or it is intrinsically valid is of little consequence to me; I don’t care why it works, I only care that it does work and therefore employ some tenets of the system in my trading.

In summary, I am a scalper and I am interested in momentum in the direction of the trend.  I don’t use predictive trading systems; I rely upon price action, support and resistance, trend lines, and some limited use of Fibonacci analysis.  I keep it simple and try not to overload my methodology with extraneous charts and unnecessary information.  Scalping is not for everyone, but it is a very effective method in which to trade.

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Day Trading: Focus on the Price Action

By , 9 October, 2010, No Comment

From the onset, let me explain that I use momentum oscillators and a number of moving averages in my ES e-mini trading. On the other hand, momentum oscillators and rate of change indicators are not my primary focus in trade selection. There are several reasons for this, but my best explanation lies in the fact that most oscillators and indicators are lagging indicators. In short, these tools often lead you into late trade entries and tardy trade exits.

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Day Trading: High Probability versus Low Probability Trading

By , 11 September, 2010, 2 Comments

In summary, we have looked at trading against the trend and concluded that countertrend trading results in low probability trades, on the other hand trading with the trend results in higher probability trades. We have also noted that known support and resistance are prime movers in determining the feasibility and potential profitability of any trade. Price action is the name of the game, and learning to read and interpret what price action is telling a day trader is the real secret to trading success. If you can master reading price action, it is highly likely you can become a successful day trader.

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Beginning Traders Can Learn to Day Trade Effectively

By , 28 June, 2010, 3 Comments

There is a general feeling among experienced day traders that beginning traders cannot trade profitably for several years. As a trading educator, however, I have found that properly trained beginning day traders can trade effectively from the start. However, the trader must be motivated and well versed in the material presented, and have the self discipline to adhere to the parameters of the trading system being taught. This is, of course, no small task. Just the same, the financial rewards far outweigh the time and effort expended to develop the skills necessary to trade.

In my program, The E-mini Trading Professor System, we have found that beginning day traders can be a profitable within several months of starting our system. It is important that the trader sticks with the rigid guidelines established for proper trade setups and maintain that discipline throughout the course of an average trading session.

Once a beginning trader learns to day trade only with the trend, which is one of the most important aspects of our trading system, trade selection becomes very far easier process than trying countertrend trading techniques. Learning to trade with the trend is no small feat, either. There are many countertrend trades that, at first glance, appear enticing and a sure bet to earn money. Unfortunately, countertrend trades are generally just retracements in a broader trend and must be avoided in order for the beginning trader to profit.

Much of what we teach in day trading centers around the psychological/emotional approach that is necessary to trade successfully. Many trading educators do not devote much time or effort in stressing the importance of psychological/emotional considerations. We consider these issues to be among the most important and toughest skills to master in the day trading process and devote several modules in the course that consider psychological/emotional considerations at length. If you can control your mind, you can control your day trading and make sound, rational decisions about selecting the proper trade set up.

While every day trader may not be ready at two months to trade profitably, many are. It’s important to understand that every beginning day trader assimilates information at a different rate and in a different manner. That being said, some traders are ready to trade earlier than others. On the other hand, I have not found a correlation between how soon a trader is ready to trade and the ultimate success they achieve. Simply said, some traders are ready to trade earlier than others, but once the trading methodology is assimilated there is no appreciable difference in the actual performance. I encourage beginning day traders to take their time and learn the information at a rate they are comfortable. This approach assures the proper retention of the information.

Bottom line; beginning traders can trade profitably sooner than it was once thought. I say this was one caveat though, the traders who have learned the information and practice the most on a demo account are the ones who enjoy the greatest success. Jumping into trading a live account with real money involved is not encouraged; on the contrary, it is far preferable to hone the beginning trader’s skills on a demo account so that they understand, in a real sense, the material presented in the course and can apply it.

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Day Trading: Do You Find Yourself Falling in Love

By , 10 June, 2010, 1 Comment

Once the novice trader has proven his or her competence in basic trading, he or she has started down the path to trading success. Day trading skills are important to assimilate in a timely manner and hone with a solid dose of demo account trading, followed by live trading on the contract they have chosen. In the day trading world though, chart reading skills and trading experience are only one part of the equation for success. The next component in a successful traders skill set is the ability to manage trades.

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Do You Keep a Trading Diary?

By , 10 February, 2010, 1 Comment

The point of keeping a trading diary is to remind me that I’ve must remain a student of trading at all times. Regardless of whether I’ve traded 25 years, or 25 months, or 25 minutes it is important to keep the student mentality. In my opinion, this is where many traders fall down. Learning to trade is an ongoing process, and the market has many moods and unique price action. Sometimes it can be months or years before similar situations arise, and it’s handy and useful to note these anomalies so that you might be better prepared the next time they occur.

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Natural Born Traders: Fact or Fiction

By , 23 January, 2010, 2 Comments

dayThere is a common misconception that some people are born today trade. In my experience, after knowing hundreds of day traders, I have never met a trader who could naturally trade without any training. I will readily admit that some day traders are quicker than others to learn the basic principles of trading, and I would also go so far as to say that some traders have a difficult time learning even the rudimentary principles of traders. After all, we are all gifted with different skill sets, and we are not all set up to be futures traders.

This contrasts sharply with some other fields of endeavor. For example, I have a friend who is a natural born golfer. For as long as I have known him he could hit a golf ball out of sight. He can shoot even par no matter what the weather conditions. He can even shoot par when he is intoxicated, which in itself is a miracle. For whatever reason, this relationship does not hold true in the trading venue. Perhaps it is because of the natural illogic of trading systems, or perhaps trading does not necessarily lend itself to natural ability. I don’t have the answer to this question.

I am an eternal optimist, and have found that most individuals who are willing to put a certain amount of book work, a lot of practice, and dogged determination can learn to day trade very effectively. I must add one caveat, however: I have met several people, a very small percentage, who simply were unsuited to trade, and it became apparent very early in their training that trading just didn’t suit them. Again, this is a very small percentage.

It is my opinion that great day traders are trained, seasoned and combine years of experience before they become truly great traders. Unfortunately, trading on Wall Street is a very stressful field of endeavor and most day traders exit the trading game before they realize their potential. Most major investment bank trading rooms are filled with young traders, with a a seasoned veteran overseeing operations of the trading operation. I am 52 years old, and my limit for trading is about four hours. My mind tires and my concentration wanes, but the trades I make are generally well thought out and years of experience keep me out of the bad trades and help me to recognize the good trades.

And that is the rub. As a new trader you are going to make some bad trades, it’s inevitable and it is okay, if you learn from your mistakes. On a given day, there are many set-ups that look enticing, but there be one factor that precludes that trade from being successful. Your ability to discern that single negative factor is what will make you a good trader.

I want to make one very important point, though. You don’t have to be a great day trader to make money in the market. If you have learned a good system, have the proper self-discipline, and can execute your system with a high degree of accuracy…you can be very profitable in your trading endeavor. You don’t have to be great, just good. On the other hand, if you stick with trading for a long while you have the potential to be great. The downside to this situation is humorous, though. You will be the only one who knows you are great. Unless you are trading for a large investment bank, you will have to be content with knowing you are a great trader and leave it at that. But who really cares? As long as your futures trading account reflects the excellent results you are enjoying, isn’t that enough?

In summary, learn your system inside and out. In my day trading, I also learn a number of alternative systems inside out. Work on the self-discipline required to make your trading effective. Avoid entering trades based on emotion. Further, always work to improve your trading, keep a journal of your trades, and review the trades that did not work out so you don’t repeat them. And most importantly, be persistent and dogged in your approach to trading, strive for perfection, even though perfection is nearly impossible. We all have the potential to be great traders, but most don’t reach deep enough to realize their potential. Be one of the few that reaches his potential.

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