To a certain degree, your personal dedication to trading will, more or less, determine the kind of success you will enjoy.  While my job is to teach e-mini trading, it is ultimately your dedication and continuing education that will make you a profitable trader.  I remember the very best teachers and mentors that have taken an interest in my career throughout the years, and I learned something from each of them.  But the most important mentor I ever had, lit the fire of becoming a student of trading and consuming, voraciously, all I could find on the topic.

These days there is much more written about trading than in the old days.  The old trading masters were loath to share their secrets with the younger generation.  But with the proliferation of online trading, a slew of books have emerged on e-mini trading.  Some are very good, others are merely infomercials for proprietary software the author is trying to sell, and others are just plain awful.  I try to read a book a week on trading, and this causes me to encounter all sorts of authors.  I guess you take the good with the bad.

Over the last couple of weeks I have been writing articles in a “series” format, and have completed all I want to write about trend lines.  I am including links to all of the articles below and hope that you may find at least one useful idea in the entire lot.  If you do, my mission has been accomplished.  Like trading, I truly enjoy writing about trading in an unbiased and non-commercial way.

Here are the links to the recent trend line series:

As I mentioned earlier, these are articles are packed with information, facts, and my personal observations.  That being said, my real goal would be spur your interest in further interest in the diminutive trendline.

Again, have a Happy New Year…but it’s back to trading tomorrow.

Here is a synopsis of what to expect for next week:

On the hand, I suspect the market will continue to focus, to some degree, on the evolving debt crisis rippling through the southern tier of countries on the European continent. Yes, I realize the Central Banks, in a concerted effort, have opened the spigot of cheap money for the European banking system, but the systemic problems in the troubled European economies have not changed since last week.  I have a hard time believing that the average institutional investor will consider the problem solved.  To be sure, I don’t think anyone who is seriously involved with the European economic woes sees the latest round of “cheap money” as anything more than a band-aid on an ever deepening problem.

In short, I think that even the short memories of traders will completely dismiss the European situation.  Then again, I never underestimate the neurosis of the trading community.

On the domestic front, I think the number to watch might well be the ubiquitous trade balance number.  According to John Lonski, chief economist at Moody’s Analytic’s capital markets, “The positive is the trade gap has been narrowing, but make no doubt about it, one of the reasons we have lost so many manufacturing jobs is because of the heightened competition from overseas.”

From January to September, the U.S. imported $552 billion more worth of goods than it exported, with roughly 40% of that gap coming from China; and the imbalance has long been a source of tension between the two countries.

Anyone who has spent any amount of time in the trade room has been forced to listen to my rants about China’s monetary policy and failure to let their currency float, like the rest of the world’s major economic powers.  They have consistently used their “non-floating” currency position to their advantage, and put an awful lot of money in their treasury.  Falling interest rates and troubled economies have now made their economic policy the catalyst for major losses in their currency trading.  I, for one, won’t be shedding a tear for them.

Finally, the market has been very reactive to the news, and it is difficult to predict what sort of new economic issues may rear their head.  I would count on the unexpected, as the world is currently in a state of flux.

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I had let a few trades run a bit too far in the red, and delighted in watching the market double back my way and allow me to turn a lousy trade into an impressive winner.  I doubled down on some of these trades when I was deep in red, which further enhanced my gains and ego.  Doubling down has always been forbidden in my trading, but since it worked so well I decided that I had been foolish to adhere to my long held trading taboo of adding contracts to a losing trade.

Let’s face it, I thought, after several decades in this business, I could trade any market, any trading environment, and I had gained enough skill that the money management skills I had worked hard to maintain were no longer necessary for my success.  I felt I had the Midas touch.  I thought I could turn lead into gold, I felt I had mastered the art of the e-mini, which is always a dangerous mindset.  I had a stretch where I went 26 for 28 with my new, somewhat reckless, style of trading.

Then last week rolled around and I received a heavy dose of humility and respect for the market.

The first two days went well, and then self-inflicted disaster set in.  After several days of 4-digit losses my confidence was shaken.  I was a rank amateur again, flailing away at the market and chasing after low probability trades with fervor and hopes of regaining my past trading glory.  I broke my trading rules, I ignored long-ingrained personal money management guidelines, and I felt like it was my first day of live trading.  Worse yet, by abandoning my long standing, written in stone trading guidelines that are the basis for successful trading I lost a substantial amount of money and shattered my self-confidence.

A couple of losing days will affect your whole outlook on trading.  Worse yet, my trading and money management techniques are the core concepts of what I teach and relentlessly drill into a new trader’s mindset.  Since I trade with my DOM on the screen for the entire room to view, my embarrassment was compounded by the deafening silence as my audience watched me flail away at the market and break the very set of rules I harp on throughout the course of every day. 

It was a complete meltdown by an experienced and successful trader, and the only variable that changed was the fact that I was initiating substandard, low probability trades trying to salvage the day’s losses.

In summary, it not unusual to read about the fantastic returns trading educators feature on their websites and performance reports, but even the most experienced traders can fall into unprofitable trading patterns if you fail to stay vigilant and true to the trading principles designed to minimize losses and maximize returns.  The lessons I relearned restored a much needed dose of humility to this traders psyche and reminded me that complacency has no place in any traders thought process; and that complacency shows no respect for how long a trader has spent trading.  Great traders are always vigilant and respectful of the rules that keep us in the business and last week I missed the mark.

• The individuals often have taken four of five courses prior to making contact with my course and trading room. I often wonder why, after all that trading education, these individuals stay married to an e-mini trading style that is ineffective, especially when the results of their previous trading failures are evidenced by a string of devastated trading accounts.  I believe that many of this class of e-mini traders are looking for a magic formula that will guarantee their success.  No such formula exists.
• These traders often are “type A” individuals and are very resistant to  new ideas, despite a past record that is littered with blown accounts and an ambiguous trading style.
• Often time, these traders don’t bother to read the requisite training material, listen to the videos, or study the material enough to develop some mastery of the information.  No, this individual is hoping to learn the system by watching me trading in the e-mini trading room.  This is not an effective learning technique.

On the other hand, the vast majority of new e-mini students are eager and receptive to what I am teaching. It’s important that I emphasize that I delight in a new e-mini trader progressing in their path to consistently profitable trading.  No, the frustrating group is about 10-20% of the new individuals I encounter.  Still, this is a large enough percentage to be of concern.  Why?  I believe that most individuals can learn to trade the e-minis successfully if I can get their attention long enough to listen.  As I noted, the vast majority of new traders settle into a well-defined learning curve that leads to success.  As a full time trader and educator, I take every new trader’s failure very personally and I often ponder what I could have done better with this student.  I believe there are very few people who are incapable of trading; in short, most individuals have a decent chance of success if they will let go of ego, previous trading frustration, and resistance to change. Don’t be the new e-mini trader who is locked into a constellation of thinking that is unwavering, unsuccessful, and closed to the introduction of ideas that are different from what they have previously experienced.

In my experience, a good deal of failure centers around three important factors that directly impact every new trader’s career. They are:

•    System
•    Communication
•    Experience

There are a wide variety of trading systems out there from which traders can choose.  Some of the programs are very large, some are famous.  There is no correlation, in my thinking and experience, between popular systems that can run more than $7-10000 and widely advertized and other systems which are based on sound trading methodology.  I’ve already written several articles on finding a good trading system, so I will not burden this article with that lengthy topic.

1.     Learn the System-  If there is one thing I see over and over is new e-mini traders trading real money and have, at best, developed a very limited skill level with the material and system he or she has paid for with their hard earned money.   I don’t just don’t get that thinking, but it is a rare student who starts simulator trading with me one on one that has properly prepared themselves to trade by learning the basic information of the system they are about to trade. They know some trades. They may know some of the interesting parts of a trading system, but they seldom know the details; and success in trading is in the details.  The end result of this thinking is that I end up spending a good amount of time explaining how charts and bars work when trading, when we could have been working on the business of learning to trade, not wasting time trying to hammer out the lingo and teaching the student material that is well documented in the written and video sections of a quality course.  Poor preparation is industry wide, and I read in the forums about systems I know well, and can trade effectively on my own, being bashed by individuals who “just couldn’t seem to get it” right and the concluded the system is undesirable.  I generally know what really happened.  Don’t study the material half-hearted and expect to learn the “meat and potato’s” of the system in the trading room.  Be over prepared.
2.    Communication- I have scads of new traders and potential traders come into the room and not ask a question, just sit and listen.  The most successful traders I have mentored were individuals who were fully engaged in the trading process and when the didn’t understand something, or some trade, they promptly asked why I am doing this and what did I see on the chart.  My preference is for small trade rooms that allow the room to interact.  Again, I have written an article on  this subject, but when all members of the room can speak to each other, there is a mutual learning process goes on, and their interaction, in my opinion, is often more helpful than the information I may impart.  In short, when you ask questions  you let people see where you need help and may get some suggestions how to remedy this or that.  Communicating creates a synergy in the room that allows everyone to learn.
3.    Experience-  When a new student first starts in the trading room, they generally lack any meaningful e-mini trading experience.  Simulators are great places to gain trading experience under the right conditions.  In order for a simulator to be an effective trading tool, the new e-mini trader must trade the simulator exactly as he or she plans to trade their real money.  Invariably, I notice traders trading 300 contracts on a trade, just to see how it would work.  You will probably not trade 300 contracts in your life, probably not even 100 contracts; but these playful dalliances with non-reality are very damaging to the discipline and emotional control a consistently profitable e-mini trader most employ.  In short, simulated trading programs are great if you trade with them exactly as you plan to trade with real money, but deviation from your specific trading mindset and methodology on the simulation is highly counterproductive.

In summary, I have stated the three most common mistakes new e-mini traders make.  Some spend their money on a course, then never bother to develop some mastery of the information.  Many traders sit and try to learn as “mutes,” and never get the benefit of room wide interaction.  And finally, it is very important to use your simulator in the proper fashion.  When you are consistent on the simulator, you are ready to go to the market.

In any event, it is imperative to always trade with your stop/loss limit defined and in place. I have known many e-mini traders who managed their stops mentally, without even an emergency stop, and eventually they encounter a disastrous result via a spike in the price action.  Always trade with stops in place; enough said.

But how do we set stops that are wide enough to allow a trade to develop, but narrow enough to fall within individual risk parameters.  If you run your stops too tight, you will find yourself stopped out of trades by ordinary market noise.  Too wide, and your losses can be staggering.  There are other factors when considering your stop losses targets, too:

•    Individual appetite for risk, ranging from aggressive to conservative (I recommend a conservative approach to trading.)
•    Market conditions at time of trading
•    Price positioning at time of e-mini trading decision
•    Size of traders account can sometimes dictate a certain trading style

I find myself favoring the use of the Average True Range (ATR) when considering the length of my stop/loss points.  Depending upon which author/system to which you subscribe, the suggested stop/loss is expressed as a % on the ATR; and the percentages range from 50% to 150% of the current ATR.  Though the numeric value of the ATR is an average of a pre-selected time period, they mustn’t be construed as predictive in the sense that they have an incredible sense of accuracy.  What we can glean from the ATR is that over the last, say, 14 time periods the market has average x and if things stay roughly the same, this is the kind of price range you can expect on a 3 minute bar, or whatever time period you have chosen.

So, we have learned that the ATR can give us an idea of what kind of price range/bar we have been experiencing, and barring any knowledge to the contrary, we base our stops on the ATR.
I like to use at least a 1:1 ratio on my ATR-set stops, and that may be a bit wide for some tastes, but I am a vocal proponent of using wide stops, as opposed to tight stops.  With our ATR number in mind, we now have a general idea where the price may move in the next 3-4 bars.  It’s a great technique, but don’t forget to keep an eye on support/resistance lines, fibgrid lines, and important Fibonacci lines when eyeing a trade.  Can you safely execute your trade while staying within the general parameters of support/resistance?

In summary, I have tried to make the point that stop/loss targets should be given consideration.  Too tight, and you find yourself stopped out of a trade on simple market noise; too wide and you expose yourself to excessive risk.  The key is to find that happy medium each day where you can handle a retracement without getting stopped out, and let your trade run when possible.  Great luck trading.

That’s a bit of an anomaly, isn’t it?

The intent of this short article is not to enumerate specific courses that are of high quality and other courses that are of lesser quality; the strengths and effectiveness of training courses run the gamut of effectiveness.  No, my intent is to stress finding a system that works and then learning that system so well that you can trade it instinctively.  Like many e-mini trading educators, I find it frustrating when I have a student fail.  It is my intention to train students to trade the e-mini contracts successfully.  In a sense, their failure becomes my failure.

On the other hand, every student has the responsibility to familiarize and thoroughly learn the methodologies and techniques presented in an e-mini trading course and the accompanying e-mini trading room.  Without a certain level of mastery of methodology and e-mini technique, the student’s chances for success diminish greatly.  There is, in fact, a dual responsibility by both the e-mini trading instructor and student to effectively learn and convey the basic principles of the e-mini course trading style.

Lacking that dual responsibility, most new e-mini traders are destined to fail and e-mini educators feel the pain of failure.  In short, this is the difference between a 90% fail rate and a 50% fail rate.  I have to concede at this point that at least half of all potential e-mini traders will find the trading profession unduly demanding or tedious.  Another group of students do not care to spend the day parked in front of a computer screen.  These are all normal reasons that students will leave an e-mini trading program.  Trading isn’t for everyone, and there is nothing to change that immutable fact.

But the focus of this particular article is the amount of effort that both the instructor and student must expend to reach a level of consistently profitable trading.  This is no small feat considering the wide-ranging level of information traders are required to assimilate.  In short, surveying the level of technical information can seem, at first, daunting and discouraging.  Like most areas of study though, a concerted effort by the student and consistent support by the e-mini trading instructor will result in the potential for positive results.  As I mentioned earlier, the failure of either instructor or student to exert strenuous and ongoing effort will leave a gaping hole in the student’s technical and methodological skill level.

In summary, we have discussed the dual role both students and e-mini instructors play in the game of successful e-mini trading.  A lack of effort on either partner in this “contract of learning” can result in a highly unsatisfactory result.  As a student, choosing a responsive and helpful instructor and time-tested system is essential, but the student also must be willing to provide maximum effort in achieving his or her goals.  Trading is not a profession where instincts and natural ability will necessarily lead to success.

Students with minimal training in my trading room enjoy similar success as the experienced traders who have taken a multitude of e-mini trading courses.  The reason for the disparity in the success lies in past e-mini trading instructors and the effort the student put forth in learning a particular trading course.

<b>Real Live Trading Doesn’t Lie.</b> Spend several days in my trading room and see if you can benefit from a fresh and unique view on trading e-mini contracts. Sign up for your free trading experience by <a target=”_new” href=”http://www.learn-to-trade-and-invest.com”>clicking here</a>.

Hello, hope your well, quick questions on your ES trading, may I ask how big are your stops? And are your targets? do you use range bars? what times do you trade? what is your max loss ofr a single day?All this will help me determine if it fits my risk profile:) thanks!!

Paul  (spelling and sentence construction unchanged)

I wrote back this portion regarding the risk and stop placement in my response:

Hello Paul,

I have been an institutional trader, in various capacities, for nearly 30 years, most on the NYSE, the latter years in trading rooms for a the same investment bank.  Were it me, I avoid trading the ES at all costs.  I think there are much more profitable contracts to trade than the ES where there is less professional, institutional, and computerized trading activity. I am fond of the YM, 6E, NQ, and the ten year treasury.

Stops are sometimes calculated on the ES (or any contract) by using the Average True Range, obviously if the average true range is 12+ (which it has on most days of the week), it means that the previous bars have a range of 12 ticks, it really doesn’t make any sense to enter a trade with a 5 point stop, or an 8 point stop.  Random noise in each bar (or the level of random noise) will increase your losing percentage/trade.

But let’s talk about that silly notion of risk as it relates to trading, as it is very difficult to quantify in futures trades.  For example, assuming your favorite trade profits more than it loses; risk is usually defined as stop-loss/profit target.  So the average guy would tack a 10 tick profit target with a 10 tick stop loss and think he has flattened his risk some.

On the other hand, I set an 8 point profit and 25 point stop/loss, very unbalanced and carrying a higher degree of risk than your trade.  Right?  Let’s assume an average true range of 10; mathematically I have a 30% better chance of succeeding than you.  I had a student challenge me on this, so for one week I trade the 8-25 and he traded the 10-10.  We both traded 6-8 trades a day for 5 YM contracts.  By Thurs of the week, I was up more than a $1000 he asked to be excused from the trade, which I did.

The point is simple matter of mathematics; there are too many variables in every trade to fully understand the probability, in the exact sense, of the market doing this or that.  However, when you try to control just one variable you can increase you probability significantly.  In the above example, which is a more likely event?  Will I hit my profit target of 8 or stop loss of 25?  In pure mathematical terms I have a 79% chance of hitting the 8 tick stop and a 21% chance of hitting my 25 tick stop loss.  I initially chose 10 as your profit target and 8 as my profit target, because there is a significant difference in the probability of moving 8 ticks and 10 ticks.  Just think about the math behind what I am describing and quite possibly you will rethink your understanding of risk.  Risk, in a pure sense, is based on probability and probability in, in most ways, a non-linear component.  You might refer to some of Murphy’s books, as he has done some nice work in this area, though I disagree with him in a host of other areas.

Of course, there are many other factors you could try to control.  For example, supply/demand in the actual contracts offered is an interesting area of study.  Zero sum games can have convoluted outcomes in trading when a move to the long side simply runs out of supply, in other words, there are no sellers left to supply the buyers.

In short, I usually place emergency stops at 25,  and logical exit within my own loss parameters will be my mental stop.  Don’t ever trade without a stop-loss and contract count potential loss that is more than, say, 5% of your account.  But for sake of argument, maybe I could get your to rethink your understanding of risk as a function of probability rather than a straight 1:1 linear relationship, which has always been the traditional line of thinking.

Finally, I think that you may have a certain risk profile…but when you enter the market, our risk becomes the same.  So the game comes down to picking the right set-ups, at the right time (usually with the trend), and style. Those are the variables you can control, along with some lesser variables.  I held your view of risk for many years, on a much larger scale, of course, and have only started to consider risk in the last ten years.  Come visit my room and watch me trade.  I win a lot, and work hard at managing the downside on my trades.