I have the opportunity to communicate with many traders in several different markets and an interesting question came to mind due in large part to common statements and common themes among them.  The question is the title of this article which led me to another question because the answer to the first question is often times very apparent.  The second question is “Are most traders really qualified to make their own trading decisions?”  I’m not trying to be controversial or funny in any way, based on what I hear from many of the traders that I communicate with both questions are very legitimate.

The first question is simply asking if we are making our trading decisions based on whatever trading method or model we are using which would require us to be disciplined traders or do we let our emotions, personalities and egos get in the way.  In short, do we go where the market leads us or do we actually think that we can control it or negotiate with it to go where we want it to go?  Essentially all markets will go where they go and all we can do as traders is to try to be on the right side of some of the moves that it makes.  Hopefully we can align ourselves with it and let it carry us with it for as long as possible before it turns on us or before we exit for any number of reasons.  The point is that if you are unemotionally following your trading strategy and it is a strategy that will win more times than it will lose and your losses are not proportionately larger than your wins you virtually have to be a successful trader.  It seems to me that when traders get themselves into trouble is when they start thinking too much. 

If you think about it, anytime that you enter the market, even if you enter randomly, you have a 50/50 chance of success because the price action can only go up or down.  If you have a time tested method that increases your odds from 50/50 and you have been successful with it don’t let yourself get fooled into believing that you know something about what may or may not occur in the market.  At some point many traders seem to come to the conclusion that they really do know allot about trading, they know allot about the markets in general and they really are creative in their approach to trading but what they don’t know allot about is what the markets will actually do.  Once you come to the conclusion that you really do not know what the markets will do in conjunction with all of the things that you do know about trading and the markets you will realize that the best way to make consistent money in the markets over an extended period of time is to just quit thinking so much which really just leads to guessing.

When we think too much we fool ourselves into believing that we actually know something which of course we do not when it comes to what the market will do next.  Often times we will set up our trades based on a good solid method but we just can’t leave it alone.  We need to tweak it and make adjustments and possibly second guess ourselves altogether based on what we think we know instead of keeping in mind what we actually know which is nothing. 

Separating and understanding what you actually know from what you may think you know will likely be the difference between being a very successful trader and being a mediocre trader at best.  If you know that you can set yourself up to be successful more than 50% of the time be unemotional, stop over thinking things and habitually make and manage your trades just like you are a machine, turn your trading platform off if necessary after you setup your trade.  If you can put the odds in your favor let them work in your favor by being patient and letting the market come to you so you can react to what it does versus over thinking yourself into believe you can predict what it will do.

 

 

Non-Farm Payroll and Unemployment number are released on a monthly basis on the first Friday of the month.  Today was the day we had the number released for the month of January.   The Non Farm Employment  number calculates the change in the number of people employed for the prior month, excluding those in the farming industry.  The unemployment rate is the percentage of the total work force that is unemployed and actively seeking employment for the past month.  These numbers are important for various reasons including the fact that the economy needs good job numbers to be growing strong.  These employment numbers are considered a leading indicator in that if people are working they are buying.  It is also important in the fact that it can move the market dramatically if these number come out different than the forecast.

Regardless of how these numbers come out you can see a movement in the overall markets.  It does not matter if the number is above or below the forecast it can move things.  As a trader we need to recognize the fact that a major release is happening and then look for the movements to occur in order to trade.  We never want to trade on anticipation of something happening, only when it happens. 

Let’s take a look at the charts of Gold and Silver to see what happened prior to and just after the release of these numbers.  As of late Gold has been trading around the mid 1600 level and silver has been moving above and below the 32 level.  

In this chart below you can see what was happening just before the release today. This sideways movements can be typical of the movements you will encounter just prior to major news announcements.  When looking to trade prior to the announcement you can place stop orders to buy or sell as the price begins to move.  You can see where we could have placed these two orders.  There are several issues that can happen when trading close to the announcement.  One is that if the spread widens you can get filled a poor price.  Another is that the volatility can cause you to get in and stopped out quickly.

In a situation like this you can see where you would buy and where you would sell on a move up or down.  If it moves above the buy stop you would enter a long position and if it moves below the sell stop you would enter a short position.  Now take a look at the chart and what happened after the announcement was released. 

It also had a big move up follow by a sharp move down.  In either situation you need to make sure you your are controlling your risk.

 

Hi Everybody, Bill Poulos here and I again want to go over a frequently asked question that I get from many of my students. And this week’s deals specifically with ETFs and ETF trading. And with my ETF trading students, I often get asked any one (or all) of these questions:

Can we short ETFs?

What is an Inverse ETF?

Are Inverse ETFs good to trade?

OK, first of, a lot of this maybe be a refresher for you veteran traders out there, but it’s still good to brush up on the fundamentals, so here goes. First off, when we’re trading ETFs which are more or less a set of securities, much like a mutual fund, but can be traded like a stock, we usually go long. It’s the easier, safer, and more simple way to trade ETFs MOST of the time. There are however times when we want to sell short on an ETF, and for reasons that I won’t get into just yet it’s often not possible to short an ETF. Which is why they have Inverse ETFs. 

Now an Inverse ETF is just like a normal ETF except for that it’s constructed by using various derivatives for the purpose of profiting from a decline in the value of an underlying benchmark. Getting into one of these is much like holding a short position. It’s an easy way for you to take advantage of a falling market.

Plus you don’t have to hold a margin account as you would if you were a regular investor looking to short. 

Most of these inverse ETFs are based on the Russell 2000 or the Nasdaq 100, so there’s not a TON of the out there, but they are there, and they are worth taking a look at. 

And wrapping up with the last question… are they worth trading? Well, they very well might be. While I still don’t recommend these for ETF traders just getting started, once you get your skills honed, or once you start using a trusted tradig system, then I say go for it. But do so with caution. You must trade only when the market or your trading methods tell you do do so. Don’t try to force it, and don’t get into inverse ETFs just to “try them out.” They’re specific investment vehicles that you need to be careful with, but if used properly can offer you a powerful “hedge” that can protect your portfolio when the prices start to fall.

Till next week, Good Trading!

We narrowly avoided falling over the so called fiscal cliff at the end of 2012 which would have increased everyone’s taxes.  The issue was coming at us like a freight train at the end of last year and of course our Congress with their crisis management approach to working for us only narrowly avoided the cancellation of the Bush era tax cuts.  In doing so it appeared as though many of the people that work for us in Congress were patting themselves on the back as though they thought that they had really done something special.  In reality they simply did the jobs that they were hired to do, barely, so they finally got to work and did something reasonably constructive.

Fast forward a few weeks into 2013 and we see the so called “new” Congress pretty much operating under the same crisis management style with the latest crisis which of course is the debt ceiling.  This is an issue that rears its ugly head now and again the last time being in 2011.  Back then we went through the fiscal gymnastics of reaching an agreement on raising our nation’s debt ceiling and naturally we have to do it again. 

This round of the fiscal debt ceiling feud has been talked about in the media over the past few months but not widely talked about because of the aforementioned fiscal cliff drama that Congress had created and here we go again.  The Senate has not passed a standard budget in four years but they are required to do so every year which leads to the logical question, “What are we paying them for?”  It is said that there is a plan that will be agreed upon to raise the debt ceiling for 3 months which will give the House and Senate the time it supposedly needs to agree upon a long term budget, if they fail to do so they will lose their pay.

If the part of the plan where “they may lose their pay” is actually agreed to I can hardly wait to see this one.  We may get to witness an even more disgruntled and dysfunctional congress that does allot of finger pointing and blaming each other while they are on the road to working for the amount that they typically deserve which is nothing.  My bet is that if this is a greed to we will see the most cooperative and fluid budget being passed as quickly as possible so they can continue to suck money off of the American taxpayer receiving their pay without interruption.  We would see the most sickeningly loving congress in history that results in the most amazing amount of bipartisanship and hand shaking that we have ever seen.

I’m a huge supporter of congressional term limits.  I wouldn’t even mind former congress people receiving a monthly stipend that is equal to their pay for six month or so after they have left office so they can acclimate themselves back into the work force.  I’m also up for continuing their medical benefits for the same six months.  This of course is versus today’s system where they have voted themselves the same salary upon retirement, for life, that they were receiving while they were in office while also continuing to receive better medical coverage than most of us could ever imagine, also for life, coverage that most of us couldn’t afford it were available to us. 

Maybe this will start a new trend where our politician employees will be paid based on performance.  If we did this it would at least make a small debt in our budget deficit because it is very likely that many of them would not get paid or at least not get paid that much.  The savings that we would receive very likely would show us how little return we are getting for the current dollars that we are spending for their lack of services

Hi everybody, Bill Poulos here about an indicator that many stock trading systems use, including many of my trading systems. Many trading systems often use many different indicators, but the one I’m talking about today is: Stochastics. Now in the financial world, Stochastics represent the seemingly random behavior of assets such as stock, ETF, or forex prices. Which is just a fancy phrase for it measures volatility. And when I say volatility, I don’t mean the bad type that we talked about last time. No matter what your stochastic information is telling you, if you see wild bars appearing and the market is moving in a helter skelter fashion: Stay out! Just wait for it to start trending in a more predictable fashion.

No, what stochastic indicators measure is the every day volatility that stocks, ETFs or forex go though on a regular basis. And it can help us determine if a certain security is moving in a tradable fashion. And what I like to use it for is as a marker for change. Take a look at this chart here:

What those circles represent is where a certain security was overbought or oversold, which let’s us know if we’re in an up or down market. In an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.

So at the end of the day, at the very least, you can use the stochastic indicator to help you determine the direction of the market. And that’s what I want you to take away from all of this. Because knowing the direction of the market can make or break a trade.

That’s also why many trading systems use this indicator in their methods… it does a great job at what it was inteded to do. So go ahead, take a look at the stochastics next time you trade and see if it can help you get a better grasp on where the market is going.

 

Since today is a holiday in the US I thought I would discuss a little about holiday trading.  Although most forex brokers are still open on this day the stock market and banks will be closed.  Even though forext traders can still trade we need to remember that the banks and financial institutions create the majority of the forex volume.  Because of this, when banks are closed, the forex market is much less liquid than normal.  Also, individual traders become more of a force and can influence the market a bit more.  When this situation occurs we can see two things happen.  First, the market can become even more volatile than it may normally be or second, it can become very flat in the moves.  In either situation the markets become less deliberate than what we would like to see happen when we are trading.

If we are trading in a non-deliberate market we can be entering into trades that have a lower probability of success.  If we can focus our trading on higher probability and more deliberate markets we are going to find that our success levels increase.  So, if the market is less deliberate and therefore less reliable what can we do when the banks are closed and trading volume is less?  Well, let’s talk about some of the things we can do on holidays such as Martin Luther King Day. 

1. Stop trading:  This might sound a bit drastic but it is an option for us when the markets are less deliberate.  When we stop trading we can observe the market to see what is happening so we can better understand the reasons why we might not want to trade on a holiday.
2. Trade demo:  We can take our live trading and move it to a demo account.  This will allow us to continue to trade but without the risk of our live accounts.  We can continue to practice while we allow the markets to settle back into more normal trading.
3. Analyze: We can take the time we would normally be trading and begin to analyze our trade, our strategy and our mental trading state.  It is good to do these things on a regular basis and during the market holiday is a great time to do this.
4. Back test:  This is a prime time to test out strategies that you might be interested in trying out. Take this time to create your rules and go back in time to test out how they have worked in the past chart history.
5. Read:  This is a great time to catch up on reading about the forex market.  Keeping fresh in our minds the things that are most important such as trading psychology and risk management.  Pull out that trading book you have been wanting to read and get to it.

Now these are not the only things you can do but are some suggestion of things to do when the markets are in holiday mode.  It is always better to exercise caution when trading and to try and trade when our probability of success is the greatest.  Avoiding holiday trading is one way to put the market in our favor when trying to trade successfully.

Last week we introduced some of the basic concepts that are needed in order to properly analyze a chart.  Today we are going to look a bit further into the first topic which is that of chart types.  Chart types are important as they are what you are going to be looking at in order to determine if you are going to buy or sell.  Being comfortable with the type of chart can also make it more enjoyable to look at and trade.  There are several types of charts to choose from including bar charts, candlestick charts and line charts to name a few.  As a side to the chart types you will also want to determine the chart time frames that you will be trading.  Take a look at the chart types below to see what each one looks like.

 

A bar chart is one of the most commonly used types of charts.  Notice how it is formed with the open price as indicated by the left side hash mark while the close is the right side hash mark.  It is also a way to show the high and the low with the top and bottom of the vertical line.  With this chart type we can see where the price is moving and the momentum associated with each bar.

 

Another type of chart that can be used is the line chart.  This type of chart is limited in what it shows us  because it is only based on the closing price of the time period.  These charts can give us a good idea of the momentum in that it is bullish when the line is going up and the momentum is bearish when the line is going down.

 

The candlestick chart is another one of the most commonly used charts.  These are popular in part due to the fact that they are visually easy to see what the price movements have been.  Similar to the bar charts but easier to see what is happening with the price movement.

Regardless of the chart type you choose you can get valuable information about the price action by looking at the charts.  You need to become confident at looking at the charts and one of the first things to do is to pick which type of chart you will be using.  Once this is done you can move to the next layer of evaluation which is to identify trends and support or resistance.  Take some time to review what you are doing and make sure you can read your charts properly.

I believe that one of the most common reasons for traders to fail in short term stock trading, or any trading for that matter is due to lack of discipline.  I also believe that many traders may not recognize that they are deficient in their discipline which in a way is self fulfilling, sort of a Catch 22.  We all know that “you don’t know what you don’t know” so if you don’t know I’m telling you right now, explore the possibility that one of the reasons that you may not be the type of trader that you want to be or think that you should be may be due to a lack of discipline.

Most people see themselves differently than how others see them so you may even want to present this question to the people around you that are the closest to you be because if there is a discipline deficiency in one area of your life it most likely will show up in other areas as well.  I would not suggest to ask an open ended question like “What is wrong with me?” because that can potentially lead to an answer that you do not want to hear and it could create huge problems and very long conversations but asking trusted and close people specifically about your discipline hopefully will not be a problem.

My experience from communicating with literally thousands of traders is that in general they are very smart people; they learn trading concepts and techniques quickly in most cases and many are very creative in their thought process coming up with new and innovative trading ideas.  Most traders that I communicate with are not full time traders; they actually have real full time jobs.  Those jobs range from manual laborers to engineers to doctors to entertainers and whole list of occupations.  The point being that if they are intelligent enough to function in their chosen profession they are very likely intelligent people, the question that I ask is if that is the case why do so many of them fail when it comes to trading.

Some very common things that I have observed about traders when it comes to trading is that in general they are emotional, untrusting, they lack confidence, some lack knowledge and many seem to always think that they may have a better way to trade today or right now which leads them to constantly change the way that they trade.  All of these things lead us to be undisciplined; they lead us to break our trading rules jumping into the market when our own rules may have told us to stay out and getting out of the market when our own rules told us to stay in.  It’s almost like we think that if success doesn’t happen quickly and in the specific way that we want it to happen we will force the market to bend to our will and what we want it to do, nothing could be further from the truth.   

If we could give up the notion that there are good trades and bad trades and see them all merely as trades it would free us up to trade with allot less stress and in a much more confident way.  Trading is a business nothing more or less, just like any business that we run there are constant business decisions that must be made.  Some of the business decisions that we make will be good for our business and some of them will be bad for our business but if a business owner can make good business decisions most of the time, may be 70% or 80% of the time, the higher the better, it is very likely that the business will succeed.  Trading is no different, if we look at our trading business as a business and realize that each trade that we decide to participate in or not participate in is just a business decision and nothing more we will be able to trade in a more unemotional way with much less attachment to the trades that we make.

Each trade is just a trade, no trade should be so dramatically important that it greatly impacts our ability to function or to trade going forward so we need to trust our trading method enough to blindly and consistently follow our rules, we need to trust our trading knowledge trusting that we are intelligent and we do actually know what we are doing and we need to remove the emotions or the judgment from trading.  Trading should be fun not stressful.  If we put ourselves in the best position possible to profit from the trades that we make there really isn’t much more that we can do.  We cannot control which way the market goes or what other traders do in fact all we can control is what we do and how we conduct ourselves.  If we conduct our trading business in a thoughtful intelligent and honest way leaving the emotions to our personal lives as much as possible and get ourselves out of our way we will have allot greater chance for success.  Being a full time trader would be a great position to be in because you could have unlimited wealth, unlimited cash flow and unlimited freedom in your life.  I believe that the only thing that is keeping most of us from experiencing this is us, when we learn to get “us” out of our way and when we learn to trust ourselves in our trading, success will quickly follow.

Whether you are trading Stocks, ETF’s, or Forex, here are 3 simple but very important rules that you should make part of your 2013 trading plan!

While it is still early in the New Year it is important to set out clear objectives and goals for your trading plans.  Last week we spoke about the importance of committing your trading plan to writing.  Let’s discuss the 3 things that should be part of every successful traders plan.

First, when entering a new trade, ALWAYS use an initial stop loss order.  A good system should identify an appropriate level to set your initial stop loss just in case your trade goes against you.  While you may have a great system, no system is perfect and you need to plan the exit if your trade goes in the wrong direction.  I generally like to use an initial stop loss order that is based at least in part on a relevant price action.  Another good rule of thumb, is to use a 2 ATR (AVERAGE TRUE RANGE) as an initial stop.  Also, once you have identified a good initial stop loss level the other part to the rule is leave that stop loss order alone until the trade moves in you favor.  Don’t get in the habit of “widening” your stop loss to leave a losing trade in longer and potentially lose even more.  Give your trade enough room in the first place so you won’t get stopped out to quickly. Once the trade moves in  your favor, you can move the stop to break-even and start trailing the stop to start protecting your profit as it continues to move in a profitable direction.

Second, make sure that whatever trading system or method you are trading has good clear entry signals and then make sure you follow them.  One of the easy mistakes for traders to make, especially new traders, due to uncertainty or lack of confidence in a trade, is to hesitate to enter a trade at an entry signal. Then, once the trade starts to move in a favorable direction, to be tempted to enter the trade too late after much of the move has taken place.  Often, this is referred to as “chasing” a trade by entering after the best entry.  If you miss at trade simply wait for the next good one, don’t enter a trade late just to find yourself in a potentially losing position. So the key here is, if you miss an entry, let it go!

Third, control your risk by never allowing yourself to trade with more than 2% risk per trade.  It is important to justify you risk in real dollars for each trade, before you enter a trade. One way to do this is to make sure you calculate the dollar amount of risk that is appropriate for each trade.  For example, if you have a 10k account, you calculate that 2% of 10k is $200.  If the difference between your entry price and stop loss price is $2 than your appropriate position size would be 100 shares.  So, trading the correct position size based on your account size is the key to controlling risk.

If you follow these three trading rules, using initial and trailing stops, not “chasing” or forcing trades, and keeping your risk at 1-2% max risk per trade, you allow for a better chance of success in the long run.

Hi Everybody, Bill Poulos here and I wanted to talk to you about some interesting questions I received the other day. I often do special one on one coaching sessions with my students, or we have webinars where we field questions too. It’s all part of our commitment to making sure our students truly succeed. And I’ve found it’s also a great place to see what traders need help with.

The first question I want to go over is about shorting stocks. Can we short stocks? Should we short stocks? Is it smart to short stocks? These are all common questions. And for those of you who are just getting into trading, “shorting” a stock means to see a stock, as opposed to buying one. Short selling is the sale of a security that isn’t owned by the seller, but that is promised to be delivered as in they “borrow” it from their broker and then sell it at hopefully a profit. Now it sounds a little complicated, but once you short sell a few times, it really isn’t. 

My answer is, first off be careful. Shorting stocks is not something a beginner should get into, and in some cases, such as an IRA you can’t short securities. BUT, once you know the rules, and the market cooperates, then you can do very well shorting stocks. Again though, be careful: GOing short requries even more vigilance than going long as the markets can become very volatile very fast. Someone also asked when you have an opportunity to go long on a security, or short on another, what would you do? My answer is always go long if you can. It’s easier. Less complicated and often carries less risk.

The second question I wanted to over with you today is what to do in volatile and flat markets. I have many students ask me what to do when the market is moving sideways and not trending very well. They get antsy and they want to trade. Unfortunately, my answer is STAY OUT. Yes trading is fun and trading is exciting, but you need to stay disciplined. These flat markets are nothing but trouble. You might enter the market and just watch your trade sit there, doing nothing, or even losing. Just step aside and wait for the markets to move again. There’s no reason to trade these markets when there are so many others that cold be trending nicely. Wait. Be patient. And wait for a nice smooth deliberate trading market to appear before you jump back in.

Then I often get the opposite question: “What do I do if the markets are volatile ” Or “What do I do before a new event?” My answer is the same as trading flat markets: STAY OUT. There is no reason to trade these markets! They’re too risky. If your charts are looking like a mess with extra long bars and huge wicks, it’s too volatile. And I always give the same reason: there are so many markets and trading opportunities out there that it’s just plain irresponsible to trade less than desirable markets. Don’t do it. Stay in cash and wait for the market to come to you. Don’t force the market because you can’t, and if you try, you’ll nine times out of ten end up losing.

I’ll be sitting in on a few more coaching sessions next week so I’ll be back with more questions and answers, but until then, good trading!