After working with hundreds of traders from beginner traders to traders with a great deal of experience, I am still amazed at how many traders make several simple mistakes in their trading which can really short circuit their trading success. This week I will discuss 3 very common “rookie” mistakes that all traders should avoid.

1. Not structuring your trades. Every time you enter a trade, you should properly structure the trade with an initial stop and a good target. Now there are several ways to determine what these levels should be using support and resistance or Fibanacci retracement levels or the Average True Range (ATR) based on the average movement of the price levels. What ever method you use as determined by your trading system, the important thing you should determine in advance is what your realistic target is based on the current market conditions and where you should put your stop based on current market conditions and then place those exit orders profit targets and stops accordingly.

2. Over-leveraging your risking too much per trade. Always predetermine your risk before you get into a trade which will keep your position size in line with your account size. A good rule of thumb is to trade between 1%-2% risk per trade maximum. The first thing to do is to determine what that risk per trade is in dollars. If we have a 10k account we can then risk up to $200 per trade. (10k account X 2 %) The next thing to determine would be the total share to trade or the position size based on the $200 maximum risk. The way to calculate the position size is to calculate the risk per share. To determine the risk per share we calculate the difference between the entry price and the initial stop loss level. For example, if our entry price is $25 per share and our initial stop loss is set at $24 (I believe that a stop loss level based on support or resistance is better than a predetermined set stop loss level.) based on this example the risk per share would be $1 per share so we could trade up to 200 shares and limit our risk to a 2% maximum. This will help us limit our risk and not accept more risk than is prudent per trade.

3. Letting emotions keep you out of good trades or enter a trade late. Nobody likes to have a losing trade, however this is part of trading. If you have properly structured your trade and utilized your risk management rules, limiting your risk to an appropriate amount, then you need to control your emotions, especially after you have had a loss or two. If you don’t follow you entry rules and “talk yourself” out of a trade, you could end up passing on the good trades. Also, don’t chase a trade, meaning hesitate to enter, and then enter late once the trade becomes profitable. You must avoid entering a trade late because often when you enter a trade late you may have already missed some or, perhaps even the entire move.

If you can avoid these common mistakes you will be much more disciplined traders. Follow these simple rules: Structure your trades and don’t let emotions control your trading!

What do you suppose your money does when you aren’t watching it? Do you think it continuously works hard for you, regardless of how much attention you give to it, or do you think it can get lazy and sidetracked and start doing other things? Is it possible that it could even leave to go hang out with someone else if it is continuously ignored? If you think of your relationship with money the same way you think of any other relationship, it makes sense that it may act similarly to how a person would. If you stifle its growth, it may tend to act out, trying to get away from you, going to a place where it can have more freedom and room to grow, no different than what anyone would do; however, if you monitor and watch it, allow it the freedom to grow and work for you, it may be satisfied enough to stay with you, continuing your relationship.

Money can be looked at like any other asset in the respect that what it is doing needs to be monitored and adjusted on an ongoing basis. It is an asset, just like a boat, a car, or a house and, from time to time, it needs to be updated and, in some cases, even repaired from damaging situations that may have occurred. Just like most other assets, money cannot be ignored and left completely alone, it needs to be maintained; however, unlike other assets, we really don’t own our money in quite the same way that we own other assets. When we use some of the money that we are currently controlling and buy something with it, turning it into an asset that we do own, the relationship with that asset is very different than the relationship that we have with money. If we exchange the money that we control into a hard asset, we actually own the asset, meaning that we can do anything we want to with it. We can use it, sell it, give it away, improve it, destroy it, or just about anything else that you can think of; however, we cannot do all of the same things with money. When we are holding hard currency, it can be physically destroyed by us or by events that are out of our control, but we can’t improve or change it and we can’t sell it; we can only maintain a balanced relationship with it, which will keep it in our possession for as long as possible.

There is an old saying which is, “We need to teach people how to treat us and money is no different.” We need to teach our money who’s the boss, making sure that it knows that it serves us and that it needs to do what we direct it to do. Often times, money seems to have an attention deficit problem, easily getting sidetracked, wandering about with no real direction, and not accomplishing much, which is why we need to direct it and tell it what we want it to do. Once we have done that, we still need to monitor it because it tends to get off track frequently. It seems to want to aimlessly wander around, either getting into mischief or just being lazy and relaxing. I think this may be where the old saying comes from – you work hard for your money, so your money needs to work hard for you. This makes sense because if you go to a job everyday, earning money to add to the money that you already have, but if the money that you already have has bad habits and is allowed to be unproductive, then the new money that comes in will really have no other choice but to be as lazy as your older money.

Money flows to the path of least resistance, like water or electricity, so the more difficult it is for it to flow to you, the more likely it is that most of it will flow in a direction other than towards you. Often times, people with money flow problems or with problems maintaining the money that they do control, will also have energy problems around the flow of money. The blockage in their money flow can be unblocked, they just need to recognize that the blockage is there so they can learn what they are doing to create the blockage and then they can learn what to do to break it up.

Whatever it is that someone wants to accomplish in their life they need to have a plan for achieving it. It would only make sense that if we wanted to become successful at something that we would have a plan outlining how we are going to do it. If you wanted to become a doctor or lawyer or plumber or teacher or anything else you would have specific steps that you would take to reach your goal. It should not be surprising that to become a successful trader that you would need to have a similar type of plan so you can reach your trading goals. Unfortunately, too many traders expect that their success will happen without taking adequate time to plan for the success. In fact, having a well-defined and written trading plan is one of those things that often times separate traders who are successful and those who are not.

With this in mind it should be obvious that we should put some serious thought into our trading plan. A trading plan does not need to be extremely long but it should be detailed enough to show you what, when and how you are going to be trading. Here are some suggestions that might help you in beginning to develop your trading plan.

First, take some time to come up with your trading mission statement. This statement should be the thing that drives you towards your success. It should not be focused on money but rather the reasons why you want money. For example, your mission statement might sound like this: I trade in order to help my family achieve the standard of living and financial freedom we desire. Now this is kind of vague but you get the idea. The reason why we trade is more important that just saying we want to make money. This way when things get tough we can read our mission statement and remember that we are trading in order to help those that mean the most to us. Now it does not need to be about family but it should be something that is important to you as a person. Take enough time to think about this so you can make it meaningful.

The next part of a trading plan should involve the process in which you will be trading. You can break this up into several parts. The first thing you should think about and write down are the conditions needed in order for a trade to be place. These setup conditions should be clear so anyone could look at the charts and understand that a trade is setting up. It could be something like the trend is up and price is near support but in much more detail. The next thing you need to define is the entry trigger rules to actually place the trade. This should be done for both bullish and bearish trades. Again, make sure you are detail in your description. Finally you will want to define your exit rules and how you will get out of your trades.

The last part that you will want to write down is your risk management rules. Those things you will be doing in order to avoid taking too much loss in your trades.

As you write these things down you will find it easier to follow your trading plan. In doing so you will be able to achieve the success you desire in your trading. Take some time to think about these things and begin writing out your trading plan.

In previous articles, I have discussed the disadvantages of buy and hold investing. For decades now Wall Street has preached that the Holy Grail of investing is to “buy-and-hold” and that that is the only “safe” strategy to make money in the market. These same Wall Street experts have claimed there’s no reliable way to time the market, and you have to be fully invested at all times to benefit from the growth potential that equities offer in the long term. In reality, the person who cares the most about your portfolio is YOU not your money manager! So with a trading system that best fits your investing goals, you are the best person to manage your investing and trading decisions. This can be done without a traditional old school money manager or a mutual fund company that wants to manage your money and have you to leave securities under their management for years at a time.

With today’s market fluctuations, Swing trading can be much more effective than the traditional buy and hold trading. And one of the best ways to get started actively swing trading, is to invest in Exchange Traded Funds (ETFs) instead of individual securities. Within the ETF world there is a large selection to choose from with a wide range of choices, I often get the question: “How do you know which ETFs to invest in?

There is such a broad range of ETFs; investors new to them have a hard time understanding where to start. My suggestion is to always start with things you are familiar with and then branch out to other things as you feel comfortable with the various options. Now, the best way to get started is to become aware of what is available. With so many choices it is best to group the ETF market is to general categories. Generally I categorize the ETF market into three different groups; Equity Index ETFs, Bond ETFs and Commodity ETFs.

Now within each category there is no shortage of ETFs choices available. There are bull market ETFs that follow the uptrend of the market. There are bear market ETFs that are constructed to follow the downtrend of the market. There are ETFs that are leveraged double or triple the market’s average move. In Index ETFs, you have large caps, medium caps, small caps, international index funds and emerging market funds, the choices seem almost limitless and just when you think you have it all down, more ETF’s are issued.

In addition, to the wide range of choices available, another major advantage to ETFs is that you can swing trade them just like an individual stock including trading orders with entry orders, stop loss orders and profit targets. Also a big advantage is that many ETFs are optionable.

In summary, a big part of a successful investing strategy in the future will be changing a buy and hold investing strategy in mutual funds or individual stocks, to Exchange Traded Funds, including a more active more active swing trading strategy starting with several diversified ETFs.

Trading is like any other discipline in the respect that it takes time and experience to get good at it and you may actually never get good at it. Regardless of what your goals are in life you typically have to put in the time and effort it takes to achieve them however I have observed that many traders seem to believe that trading is more of a “get rich quick scheme” than it is a discipline or a business. Whatever job you start or whatever profession you choose to go into it is doubtful that you will know everything right from the very first day on your job, it takes time to learn a job or a profession and you typically will be trained in some way by the people that hire you or the people that you work with. If you are a business owner the same or similar things may be true with an exception being that you may not have the luxury of being trained by someone with experience in your field. Training from business professionals in order to learn how to run and operate a business is readily available but training for a specific unique business is something that may be a little more difficult, the trading business is one of those unique businesses. The reason for this is because for an individual trader with a trading business there won’t be employees to manage or customers to service or people to sell something to however there will be a lot of ongoing education, studying and a lot of time spent looking at price charts.

I am not sure how the IRS treats securities trading businesses but even if you do not make it a separate business entity and you retain all accounts in your personal name, treat it as if it were a business separate from yourself. Take all of the allowable deductions for all of the expenses and the overhead that you incur with the help of your tax advisor. It’s best to be rigid with your discipline treating your trading business very seriously because building your assets over time through trading and investing may be the difference between being able to do the things that you want to do in the future and being restricted and limited with regard to what you can actually do. How effectively you build and manage your assets will likely have a direct impact on your future lifestyle. The more disciplined you are now, the more you learn and the better decisions around trading and investing you make the more likely it is that these good habits will last throughout your entire investing life. This will make it increasingly more likely that you will be able to relax and enjoy life in the future.

There are a lot unique things about trading the least of which is that you may never have to stop doing it. Since it does not involve hard physical labor many people are able to trade their entire adult lives. Even when you consider yourself retired you can still produce regular income or supplemental income for your family through your trading account. There is also a very strong likelihood that by learning to trade and by trading successfully for a given number of years you may not need to trade anymore at all at some point, at that point it will be purely a choice. You may be able to put yourself in the position to just enjoy what you have earned throughout your trading career as long as you learn good trading habits, good money management techniques and of course good trading methods but it all starts with discipline.

One of the more unique things about the trading business is how quickly you can increase your income versus other professions. If you ask almost anyone with any job or in any profession what they would need to do to double their income or even just to earn more money most of them would say work more hours, see more patients, get more clients, get a part time job or get a better paying job. If you are a successful trader increasing your income is simply a matter of trading two currency lots versus one, trade two options instead of one or increase the number of shares of stock or ETFs you are trading. In this regard the trading business is unlike any other business. As long as you take the time and put in the effort the rewards of years of trading can be the greatest source of money and retirement funds you will ever receive. It also doesn’t place limits on the age you need to be at when or if you retire. As previously stated you can feasibly trade well into your senior years but you can also stop trading if you are successful enough at a relatively early age.

The Federal Open Market Committee or the FOMC is a government entity that is the monetary policymaking making part of the Federal Reserve System. The FOMC is made up of twelve individuals, seven of which are members of the Board of Governors and the other five are from the twelve Reserve Bank presidents. The member that is the Chairman of the Board of Governors acts as the Chairperson for the FOMC. In addition, the president of the Federal Reserve Bank of New York is the Vice Chairperson and is a permanent member of this Committee. The rest of the presidents of the Reserve Banks will complete the other four voting position. These other four serve on a rotating basis while the rest of the Reserve Bank presidents participate in the FOMC meetings but are non-voting members.

This Committee will meet together eight times each year to discuss the monetary policy for the United States. They will consider what is happening with the economy and make the determination on what steps are needed to help the economy grow and remain strong. One of the primary responsibilities for this committee is to set the interest rates. As changes are made, what the FOMC decides to do can dramatically affect the overall stableness of the markets. Generally after they meet together they will release a statement with their overall decisions on what they will be doing to help the economy. In addition, on occasion, they will have a press conference after the release to discuss and answer questions as to why they made their decisions. Regardless of whether there were changes or not, the FOMC can cause volatile to come into the marketplace no matter what market you are trading.

This week we saw the FOMC have one of these announcements as well as a press conference. Currently, Janet Yellen serves as the Chairperson for the Committee and she is the person who will be the spokesperson at the press conferences. As the pending release approaches, we can often times see the markets become a bit jittery with their moves, once the statement is released the jittery movement can become fairly violent in the reaction especially if the statement is different than what the forecasters were expecting. As you take a look at the charts from this week, you will be able to identify when this new release happened. You can see how the price moved before, during and after the release occurred.

One of the biggest issues with trading news is that it can cause the prices to move in an unexpected fashion. Because of this we need to make sure our risk is not too much for the possibility of big moves. This means considering taking smaller position sizes during these times. Risk control is crucial when we are trading news like the FOMC announcement. If you are not comfortable trading during highly volatile new then it is ok to sit aside and wait for the volatility to pass. Regardless of how you approach your trading during these times you will need to know when these big announcements are coming out. Take some time to review the economic report calendars to make sure you are prepared for them each day.

Last time, I discussed the differences between technical trading and fundamental trading. Mainly the difference boils down to what information you look at to make a decision whether to trade a security or not. Whether the specific and general fundamental data, or the charts along with technical indicators is what you use to primarily base your trading decisions Today, I am going to mainly focus on technical trading and what style of trader you are. There are several different trading styles that I will discuss. These will mainly be categorized into three main types, very short term “scalp” trading, mid-term “swing” trading and long-term position trading.

First of all, let’s tackle short term day trading or “scalp trading.” Scalping as it is commonly called is very short term trading, looking for quick short-term gains. This is especially popular in the Forex and futures world of trading. A “scalper” will generally use shorter term charts like a 1-minute, 5-minute or 15-minute chart. This type of trading is very active and can be very exciting, but can also be very stressful and demanding. Typically you will need to dedicate entire blocks of time to this type of trading to be successful and while you can do very well, there is increased risk in more volatile times and markets. Generally scalpers are looking to get in and out of trade during the current trading session. The idea is that as a scalper you would be more of a “jump in get your profits and get out,” trader or if the market moves against you close the loss quickly while it is relatively small. As all type of trading it is very important to use strict risk management but especially in quick short term trades.

The second type of trading is mid-term swing trading. Typically a “swing trader” is looking for longer trades then the scalper with larger profit targets with longer-term trades. Swing trades can run anywhere from several hours to several days depending on the market. A swing trader is looking at longer-term charts than the scalper, generally between 1 hour, 4 hour and daily charts. The idea is to allow your trades to develop over a longer period of time to larger profit targets that take some time to reach.

The third style of trading is more of a “position trading” style which is longer term than even swing trading and is typically looking for long-term trades in good trends that can last for weeks to months. Generally a position trader is not too concerned with short-term charts or markets and will use most often use daily or even weekly charts to determine longer-term market momentum. Larger targets that come with longer term trades also can have potentially larger losses if you are not using good risk management, so again it is very important to identify your maximum allowable percent loss and limit you potential trading losses to this amount. Typically 1-2 % should be the maximum allowable loss.

In conclusion, regardless of what markets you trade, you need to decide what style of trader you are; either a short term intensive scalping type of trader, a mid-term slower paced swing trader or a long-term position trader and then adjust your charts targets and risk management to fit that style.

There are two common ways most traders follow when trading. They either like to take trades that move in the direction of the trend or they like to take trades that are counter to the prevailing trend. As you develop your trading style you will most likely have a system that follows one of these two ways to trade. Some traders develop trading methods that will trade with the trend as well as counter to the trend. This way you are prepared to take trades as regardless of what the market is doing.

When trading with the trend you will be trying to take advantage of the overall movement that is happening with the price action. This is type of trading means that you first identify what the current trend is and then have a trigger that gets you into the trade in the direction that the trend is moving. An example of this would be something like a pullback trade. This type of method would first have you identify the trend as bullish or bearish, then wait for the price to move against that trend. So if the prevailing trend was bullish, you would look for the price to move down. You could specify that the movement would need to be down 2 or 3 bars in order for the pullback to be sufficient. After the pullback happens you would then look to enter into the trade as the price begins to move back up again. This could be done with an indicator like the stochastic or waiting for new bar to be formed in the direction of the trend. Now this is just a basic example of what a trending method might look like but the idea is that you would have a method to get you into the trade in the same direction that the trend is moving.

When looking at a counter trend method you will be looking to enter the trade as the price begins to move the opposite direction that the trend is going. Often times these trades can be short lived because the trend will begin to take hold and the price will move back in the direction that it had been going. Because of this you need to make sure you exit before the price moves back with the trend. One common counter trend method is to trade price divergence. A price divergence on the chart is when the price is making higher highs and the indicator is making lower highs. It can also be when the price is making lower lows but the indicator is making a higher low. These are examples of bullish and bearish divergence. Some of the indicators that can be used to find divergence are the stochastic, RSI and CCI. As this divergence appears you would look to enter the trade opposite the direction of the trend.

As you begin to look at developing your trading plan, consider having both types of trading methods to trade. By having both trend and counter trend methods you are giving yourself more opportunities to take trades in all market conditions.

Today I will discuss the difference between technical and fundamental trading. First of all, technical trading based on technical analysis or technical trading is mainly concerned with the price movement of a security using the charts and technical studies to predict potential price movements. While fundamental trading, looks at fundamental analysis mainly based on specific economic factors, or “fundamentals,” which makes up the basis for fundamental trading.

Fundamental Trading

Fundamental analysis looks at specific financial data of the company behind the stock to determine whether the company’s business activity will result in a higher or lower stock price. This financial data would include company revenues, profits and losses and business trends, as well as growth factors that will affect the future stock price. Fundamental analysis may also look at broader macroeconomic factors such as the business sector and the overall economy in relation to a company’s area of business. Fundamental analysis is geared toward understanding the company behind the stock. Some of the specific factors fundamental traders focus on when doing fundamental analysis are can be broken down into 2 general categories:

1. General economic factors such as Supply and Demand and other economy new and specific industry factors.

2. Specific data including such things as Price/Earnings ratios, Price/Sales ratios, Price/book value rations, etc. Profitability: looking at gross sales, gross profit margin, operating margins, earning per share, and net profit margin. Also, factors like growth rates, Potential revenue growth, financial strength, returns on investments and return on assets. Sometimes these many company specific factors are complicated and difficult to understand.

Fundamental Trading is generally reserved for more of a “buy and hold” style of trading as the investor is looking for long-term value.

Technical Trading

Technical trading on the other hand looks at price action using charts patterns and technical indicators to determine potential price movements. The theory behind technical trading is that all information about a stock is built into or factored into the share price and therefore analyzing the price movements will help predict where a stock price might go.

Technical analysis is appealing to more of a shorter-term swing traders as opposed to fundamental longer term buy and hold strategies, and has become more popular in recent years, due the fact that trading systems can be developed with a specific set of rules to trigger buy and sell orders. There is also a wide range of indicators for a trader to choose from, allowing the trader to set up a trading system to fit his or her trading style.

In conclusion, there is a place for both kinds of analysis in short-term trading, I definitely prefer a technical approach to trading, where you can analyze price movement and be in and out of the market, as opposed to longer term fundamental trading which leaves you investing for longer term moves based on fundamental values. With Technical Trading you should use a trading plan based on charts using simple technical indicators, but also maintain an awareness of basic fundamental factors, especially broad economic factors, which may affect a specific stock or specific industry that you might be invested in.

When holding an investment for the long-term how do we know how long that long-term is? Is the long-term perpetual or is it a finite amount of time? Do we exit long-term buy and hold positions when we see a good exit point and reestablish them at a more advantageous level or do we just sit and let the market take us where it goes.

For long-term buy and hold positions the investor holding those positions should really be asking these or similar questions right now. The US stock market has been on a three year Bull Run without a major correction but the longer the run lasts the more one has to wonder if it is storing up energy for a big move down at some point. The question about moving to cash should really be more prevalent for a long-term investor than it is for shorter term traders because traders and investors with a shorter time horizon will naturally exit the market where long-term investors do not think this way. One of the problems with the buy and hold strategy is that long-term investors buy into a long-term financial product and hold it for years. Most of the time it doesn’t matter if the market goes up down or sideways long-term investors will continue to hold regardless of what happens.

I believe that one of the biggest things that buy and hold investors lose simply by employing the buy and hold strategy is time. The market can go on a nice run like what we have been experiencing for the past few years but it can give it all back quickly meaning that all of the time it took for the investment to move up and come back down to very near its beginning is lost and can never be recovered. We have seen this happen two times within the last two decades. If a long-term investor entered a long-term equity position in approximately 1996 by the third quarter of 2002 they had seen their value rise substantially and retrace to even. By the end of the first quarter of 2009 they saw this same scenario play out again meaning that the 1996 investment thirteen years later was about even. I do not know what the investment time is that the average person has but if they begin to save and invest in their early to mid 20’s with the expectation of retiring approximately 40 years later near age 65 one quarter of their investing life was given up by allowing the investment to rise twice and drop back down twice. It took until the middle of 2013 for the investment to regain the growth that it had originally achieved on its first run 13 years earlier in 2000. The total time spent on this investment at this point is about 17 years. This is over 42% of a 40 year investment life just to get back the amount that was originally gained in the first 4 years of the investment.

We are currently at another investing crossroads because right now in the third quarter of 2014 the same long-term investment should be up somewhere around 28% from the 2000 high. If we experienced a 28% correction or a combination of smaller downward moves that total about 28% the investment would be back near the level it was at in 2007. There is no way to know how long it would take after that to return to current third quarter 2014 levels but it is safe to assume that it would take at least a few more years which means that it would take well over 50% of a person’s investing life to achieve a very nominal rate of return. If the same investment were managed with a little more common sense the investment could have doubled approximately 4 times just by the movement of the price action. I am not saying that its original value could have increased 4 times I am saying that it could have doubled 4 times.

The market has been on a nice run but do you think that we should learn a few things from previous nice runs and subsequent falls regardless of if we participated in them or not? Should we understand that we need to protect our growth at this time and not give much or especially all of it back? Should we be looking for a good time to protect ourselves and exit into cash before the next downturn occurs? It really isn’t a question of if a downturn will occur it is question of when. Downturns are not bad things, they have to occur, they are natural aspects of the market but if there is anything we can do to avoid them we should consider taking action and doing so.