Trading Pal Blog

There are often times when a trading instrument doesn't display any clear trend - either up or down. That shouldn't prevent you from pulling a profit out of the market if you have the right strategy.

A market is either trending or ranging; usually showing a clear move upwards or downwards a third of the time. This means most often it is bouncing between two limits. This is a safe trading opportunity.

Nobody is smart enough to pick the tops and bottoms of the market so you should not try either. Using stop orders you can enter the market only if the stock (currency, commodity, whatever you are trading) displays the expected behaviour.

As soon as you are in the market you can trigger another stop pending order to protect your newly opened position. That way you are not glued all day to the screen. You may check 3 times a day the situation with a smartphone.

A third limit order is placed in the market to collect your profit near the outer range of the trading channel. Simple in theory.

In practice several things can go wrong. How close your stop order is from your entry point is a matter of how much risk you are prepared to tolerate before you call it quits. Funnily enough the more tight fisted you are the more you stand to lose because the market noise is sure to hit a stop order placed to close - only to resume the previous move moments later...

Too much greed is also a downfall. Many have seen a good profit escape their grasp because they were not content with what was on offer on the table and wanted more.

Better many small profitable trades than no gain at all. If brokers commissions are an issue for you then shop around and find a setup that's fair to you.

Most importantly you need to keep a log of your trades and figure out your trading averages. How many losses in a row did you encounter? How many gains did you have in succession?

Remember also that the markets do evolve over time. You might have been fortunate to identify a profitable trading pattern. The market does not owe you anything and is free to branch out into a completely new behaviour without warning.

If that happens don't be stubborn. Don't jeopardize your previous gains. Go and smell the roses and study other more profitable instruments to devise a new strategy.

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The trading log from your broker tells you precious little nothing about the reasons why you entered and exited a trade. Keeping track of that information is paramount for improving your trading performance.

Trading is a game of bluff. You are betting that an equity will go up and for a trade to take place you need to find through the stock exchange another soul who believes exactly the opposite. They might need to sell for personal reasons but if they were convince the stock will continue to shoot through the roof they probably wouldn't sell - at least not at the current price...

Trading is an emotional game and in order to reign in your temperament you need to document objectively the reasons why you enter and exit a trade.

What information should then be recorded?

What trading signal did you use? Name the indicator or oscillator. Do not change indicators throughout the duration of the trade - that's a cardinal sin!

Was your trade conditional on the equity hitting a particular price level?

Upon entering what are your exit stop and your target stop orders? How long do you expect the trade to last in order to reach that profit?

Paste a copy of the current chart with support and resistance levels.

Did you do any fundamental research on the stock? Is it sensitive to any type of news (ie forex jump at changes in interest rates). Was it the subject of a broker's recommendation? What do you know about the potential of that sector? Did you read the company's annual report?

Of all the possible instruments to trade why did you pick that one? (People often wonder about that one once the trade has gone pear shape later on...)

Was it a tip from a friend? Do you have information not available to the general public?

How did you determine your position sizing? Do you not risk more than 2% of your trading capital on any given trade?

Is this trade independent of other trades you have currently opened? Can a change in the price of crude oil or the price of gold adversely affect several of your opened trades? How can you protect from that? Do you know about hedging?

Do you buy and sell all your shares at once or do you gradually build up and decrease your position?

Did you calculate the brokers' fees and your tax status in regard to dividends, etc...

That's it for now. You get the idea. You will be amazed how you discounted the importance of some of these things in the past.

Looking back give yourself a score on the execution of your trade. Did you panic and closed the position in a hurry only to see the stock reach your target two weeks later? Did you safely bail out according to your rules and avoided a blood bath? Did you execute entry and exit with total detachment for a well earned profit?

Why not compare your trades with what an automated system would do in the same circumstances. Check out http://TradingPal.net

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Don't you feel like kicking yourself when everything went according to plan but you decided to interfere with a trade? What would have turned out into a tidy profit was aborted as a loss!

How can you trade without letting your emotions getting in the way? Novice traders can execute trades without batting an eyelid. It's when you've been around the traps that fear or trepidation can rear its ugly head. External factors can also jeopardise your trading ability. Going through separation or divorce is not the time to trade no matter how much you need the extra income. Embarking on a career as a day trader when you are unemployed is not advisable either. You will put undue pressure on yourself.

It is best to be detached to your trading activity otherwise you may inadvertently cross over the line and it will become sheer gambling. A good approach is to start with a handful of stocks (meaning no more than five!) and do some old fashioned research on the fundamentals of the company. Can you corroborate from other sources what your broker is saying about each of those stocks? Looking back at 12 months price charts what were the events which caused each stock to rise or fall abruptly? Were there any trading halts, share splits, dividends withheld, etc...

In the first six months do not spend more than 4 hours a week on your share trading activity. A lot of people study their portfolio on the weekend and place orders on Monday morning. If you have a contrarian spirit, do your research on Wednesday night and place your trades on Thursday morning. Placing trades on Friday just before the close of the exchange is not very safe. A lot of unforseen events can happen over the weekend.

When you place a trade you should enter the market only if the stock moves in the direction you expect. Say equity XYZ closed at $50 and you think there is some good upside potential, then only buy if it reaches $51 - a 2% move. Bail out if it goes down to $46 - a 10% move against you. Set yourself a reasonable target - say sell two thirds of your position if it reaches $56.

Use a trading log (spreadsheet) and count how many losses in a row you have suffered so far. Tally your average gain and your average loss. Each time you take a trade and you stick to your rules you should expect to be within your track record. If things stray way out - your system is broken and you need to reconsider what you are doing. Maybe you need to trade other instruments more profitable.

After you have been trading the same 5 stocks for a year and are well versed on these equities you may leverage that knowledge to other markets - forex, commodities, indices.

One thing you can do is to compare your performance with an automated trading system and see how you can improve your skills. For such a system check out Trading Pal

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Technical analysis came of age in the fifties when RSI and the stochastic indicators were published. It was criticized by the advocates of fundamental analysis who argued that you'd better learn to read the balance sheets just like Warren Buffet does to make it big on the share market.

Then with the downfall of Enron and others it was apparent that a solid balance sheet was not enough and the argument was: "Everything you need to know is built in the price." Tomorrow's price that is - and nobody knows for sure what that's going to be.

Why on earth would you believe an algorithmic system would be any good at pulling consistent profits out of the market? Testing is the answer. You can put your day trading robot out to pasture for a while until you have trade logs to show the evidence of something above random chance in terms of success rate.

If there was a way to turn lead into gold we would know about it by now - yet financial alchemy is alive and well.

When there is greed, failure follows close behind. Yet an astute trader would readily try and use a new system to challenge common assumptions.

Markets do and will change over time. You might be fortunate enough to have locked onto a profitable pattern. The moment it becomes known and many participants start to emulate your trades, the pattern will disappear! It's called an arbitrage effect.

In the nineties William Eckhardt and Richard Dennis set up the Turtle Trading experiment. The issue was to settle an argument between the two partners, to figure out if the skills of a successful trader could be reduced to a set of rules, in other words can trading be taught? The experiment was overwhelmingly successful with novice traders ending up making $100 million. Eckhardt who thought trading could not be taught, had lost his bet with Dennis.

These days Wall Street magnates do not throw their pearls to the pigs. If you see someone promising you a blackbox trading system run away as fast as you can. Only gullible fools wishing to be parted from their money will fall for that.

One thing you can do though is compare your own performance with an automated trading system and see how you can improve your skills. That's what Trading Pal is all about.

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It is assumed that a trend is established if the instrument you are trading is reaching new highs (or new lows for a downward trend). But is there more to it?

Remember that a trending market occurs probably one third of the time. The rest (the majority) is spent fluctuating within a range.

So here is the conundrum: you want to get in early in the impending move to gather the maximum traction (profit) but you don't want to get slapped by false triggers...

Since the majority of the time is spent playing ping pong between the same two levels shouldn't you be trading that instead? When the support or resistance levels are broken you would be on a favourable trade already.

So far so good - that's the theory you're heard from information seminars and introductory books. But what is it like in practice?

The moment the future or commodity touches the boundary of the trading channel you will see a fury of activity if you have the chance of having access to an online trading platform displaying the pending orders placed in the market.

Why is it so? There is a tug of war going on. Some people are trading the channel and want to get out with the profit for that leg. Others are banking on a breakout and have stop orders in place to catch the move. Professional traders try to manipulate the market with large orders, hit all the stops in sight for a quick profit and dump their position quickly afterwards. What looked like a powerful oncoming breakout just fizzled out...

So what next? Have you considered using a trading indicator? Different people have their pet indicator. Some that come to mind are the Supertrend and the Kauffman adaptative moving average.

Only experimentation can determine if they are any good for the instrument you are trading. Yet again the common wisdom is that forex and commodities behave the best when traded with a technical analysis approach.

You have heard the phrase "the trend is your friend". What does it mean? Put simply it means that trading with a contrarian bias might be rewarding on paper but near impossible to get the right timing. Yes, you will leave some money on the table but a decent profit is better than no profit at all; or worst a loss to wipe out your last profit!

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