achieving the traders edge

The Insider’s Guide to Achieving the Trader’s Edge Investing Pro’s give you the hard truth on your trading. We have asked our customer base to participate. Some of them are long time associates of ours due to the fact that we started our business in 1996. As you can imagine, we literally have tens of thousands of people to query in our database. Some of them are very active and successful traders and some are just starting in the business. We ended up with over 1,000 questions that people wanted to ask trading pros about their trading. The questions ranged from Forex, futures, stocks, options, day trading, or swing trading. We will discuss the most pertinent and reoccurring questions. There are certain categories that come up on a regular basis. The topics that you will learn should make a difference in your trading regardless of what trading system, strategy, or approach you are using. A lot of what is going to be discussed is universal to your trading. Whether you are struggling, just starting out, or you have had some success - you are going to benefit from what you learn today. To help answer those questions, an informative collaboration has been brought together composed of Mark Soberman, Brian Short and Troy Noonan. The Speakers Mark Soberman is the long time founder and owner of www.NetPicks.com. He founded the company in 1996 and is in his 13th year of operation at the time of this writing (01/2009). He has always focused on active individual investors. As you can imagine, in 1996, he was in one of the best bull markets ever and worst bear markets ever. Now, they are in some of the most challenging markets on a global basis. We have always been working on systems, approaches, and strategies for people who are looking to day trade. Also people who are very actively working swing trade. Typically, it has initially started in options and then moved into stocks, futures, and now Forex. Our flagship product is the Universal Market Trader. The Universal Market Trader is the strategy and course that’s designed to trade multiple markets in multiple time frames. It is extremely dynamic across all the marketing conditions that we have been experiencing over the last 13 years. Before that, he took his first trade in 1984. He is in his 25th year of taking trades. It took him his first 10 years for him to get the point to where he was trading with profits on a consistent basis. That is often common with most traders who have worked independently and grown their own systems and strategies. Part of the reason it took awhile to make profits is that there are so many challenges. It is his hope that his expertise will prevent you from having to make the same mistakes. Soberman's first trade was an options trade that was successful. However, he felt it was the worst thing that could have happened. Immediately, from the start, he developed bad habits, and it took him quite some time to learn to break those habits, how to deal with the mental struggles of trading, how to do proper risk management, and to develop his system. When he started NetPicks.com, it was finally the light at the end of the tunnel. In addition, they became very successful. Brian Short is also a general partner of NetPicks.com. He has been involved for about 6 years and has had the opportunity to help and assist with development of some of the strategies that are used at NetPicks.com. His trading background extends over 20 years. He has always worked in some sort of investment from longer-term 401K positions, and he spent most of the 1990's using broker recommendations. He found that relying on other people to guide your portfolio was good for awhile, but, admitted, it took a bit of a dive. He is excited to discuss with us his current work with inter-trade trading. He has control over his destiny by empowering himself with a method that gives him an edge in the market. His results don't mean that he wins every day, but, instead gives him consistency with his trading plan. It has proved to be a personal success that shadows the advice that he imparts. He uses the Universal Market Trader on a daily basis, and it has allowed him to identify some of the stumbling blocks that traders have. Relating to his own past experience, he identifies with these traders and has worked with many of them to become successful traders. Troy Noonan joins the panel as a former student of mentor Brian Short. He was an actual trader that Short met through the NetPicks.com Universal Market Trader. Noonan started trading in the early 1990's when he was still excited to receive his paper charts in the mail every day. The internet was still in its infancy and the trading world had not yet become high tech. He struck gold trading a pound against a dollar with a futures contract at a time when the pound was falling off a cliff against the dollar. He took his winnings and traveled through Europe and traded along the way. He was hooked and that is how trading became a part of his life. Eventually he came to know NetPicks.com and became a user of their systems. Ultimately he was asked to join the team and now works as a NetPicks.com coach. He also moderates a trade room for NetPicks.com and also has the experience of dealing with a lot of traders. Noonan has often heard common themes amongst traders that he can identify with because he has lived through those same issues. Question: What are the three biggest mistakes you've made? Soberman: I think this is a great question because when you are learning and looking for information, you get sold a lot of claims and systems that insist that you are going to win 100% of the time, that you will take $1000 and make it 1 million dollars, and other hype sales copy. It's easy, as traders in a newcomer's shoes, to fall victim to that kind of ads. They are appealing when you are new or struggling with your trading. You have no reason to doubt that it can NOT happen. The reality is that this is one of the biggest mistakes I've made. They are buying into the unrealistic claims that are made about trading. There is no doubt that you can be very successful with your trading. That you can ultimately have it become your living. However, it does not happen with 100% winners and you are not going to turn $1000 into 1 million dollars in six months. These things are not realistic and you are going to save yourself a lot of time ignoring all of that hyped noise that you tend to hear. They listen to this instead of just focus on trading systems and strategies where you are going to hear realistic things. What I mean by realistic are win/losses that are above 50%, average gains that are bigger than the average loss that are not succeed every single trading day or every single week. However, they are consistently profitable but with equity curves that go a little up and a little down. That is realistic trading. There isn't really anything else that's realistic. You would save yourself thousands in investments and strategies if you would ignore the ones making the most extreme claims. I have never found ones that live up to those claims. To summarize, the biggest mistake I made was buying multiple trainings, etc, that just seemed too good to be true. At the time, I really wanted to believe it. Another mistake that I made was that once I was on a good approach or strategy, I was never satisfied with the modest win rate that I referred to of 50%. Often, I would dump a strategy just because it didn't win every time. I always thought there had to be something better. I left some systems that really would have served me well because I was pursuing some systems looking for the Holy Grail. The final mistake I made was risk control. Even when I was on to something good, I used crazy risk. I remember with some of my accounts trading 4 or 5 full-size S&P contracts. Not minis but full sized with the floor. At that time they may have been $40-$50,000. If you are familiar with the leverage, that is a crazy risk. When I took a loss and my risk was 8 points, I would start risking 8-10% of trade. Back then, when you were training on the floor, the executions were sketchy anyway, and it was a really big mistake. Even if my system was good, I was going to fail because I did not have proper risk control. Short: I actually have 4 big mistakes that I have battled with over the years. In the past, I traded for Forex for about 5 years very actively. I was into day trading futures markets over the past 3 years. The first issue I had was risking way too much on each trade. In the Forex, specifically, it is so tempting with the margins that brokers give you of 100 to 1 (some cases even higher than that) to over-leverage yourself. Initially, you take a look at the trading etymology and you look at how much you can make at the Forex specifically, and you think to yourself that you can risk 10-30%. In some cases if you get a winning trade, it's probably the worst thing that can ever happen to you. It reinforces a habit that is going to become the demise of your trading. That demise will come from risking too much. You need to get that under control and, my recommendation is you need to risk a conservative amount. Either 1-3% per trade depending on the method you are using. What that does is that it keeps you in the game when you have those series of losing trades. Believe I don't care what the method is; you are going to have that series of losing trades. That will define you as a trader - how you react to that sequence and what you do about it. Proper risk, however, will keep you in the game. The next big mistake I made is jumping out of a trade before it reaches its full objective. I would have my full target objective and the trade would be progressing nicely to the halfway mark. It may have even been to the 75% mark, but, for whatever reason, I would decide to jump out! The problem is that you are not letting the trade play out to its full potential. You are risking that full risk. That doesn't work in the long run and it took me awhile to realize that. I should have let my method play out the way it should and let it reach that full target objective. One of the things we were taught early on as kids is that there is a need to be right. In this case, you need to fight that need to be right until the trade progresses in your favor. My third mistake was revenge trades. That is where you have a loser and so on the next trade you double up to win back what you lost on the previous trade. That is the biggest mistake you can ever make. You are actually doubling the amount of risk in that case and double up on that trade. So what happens if you lose 2 or 3 trades in a row? You are going to lose your capital at a much faster pace and take yourself out of the game. My final mistake was to take trades out of my trading plan. They were discretionary trades that had no rhyme or reason. I would jump on anything that moved in hopes that the market was moving to that direction. I guarantee 90% of the time, the market would take that big move up, I would jump on it behind that bar, and it would slam down lower then it was initially. My point is not to jump on those moves without any kind of a reason to do so. Stick to your method, your trading plan, and you will be successful. Noonan: Those are all mistakes I have made and more, but to answer your question, I think the biggest mistake for me was jumping on a trade system without really giving it its due diligence. You can easily see the results that someone posts. Maybe it is credible and logically, you think that you could trade this plan and get the same results. However, remember that your psychological makeup, as a human being, is not going to operate on the same playing field as your intellect and thinking. While you are rationalizing that you can trade this plan, and logically you can see that it is a successful plan. The mistake you make is that internally, you have not taken control of that plan without doing the homework and the due diligence. With that in mind, I would say my biggest mistake was jumping on top of strategy and trying to trade it. Later on, after getting kicked bloody in the markets, I realized that I didn't believe in the system and I didn't do the homework that was necessary to build my belief structure to where I could be psychologically convinced that the system was going to work. My next biggest mistake was trading with scared money. Because of my previous mistake, I was then trading it in a way where I wasn't even thinking rationally. Trading with scared money is that you are going to be taking probable losses and missing the winners. That meant that I wasn't even trading the system by that point. Scared money is lost money - guaranteed. My final biggest mistake is trying to improve on a system that I haven't even done the homework on! That led me to looking at other indicators and trying to find that magic thing that is going to keep me out of the chop. Some magic thing that was going to tell me when to take only winners that were coming and avoid the losses. None of that is possible. You end up getting caught like a deer in the oncoming headlights of a car and you are still trading scared. You end up suffering from analysis paralysis. I had to overcome those mistakes in order to become a successful trader. Soberman: I think if new traders could take down risk control, stick to their trading plan, avoid unrealistic expectations, and accept loss - then they are probably better off than 80% of the traders out there. It seems easy when you are a beginner, and you might think that you would be able to stick to this. However, you would be amazed how many people we have talked to are able to stay with their trading plan, and take proper risk control. On the psychological side, they don't accept losses as they come and move on to the next trade. Logically, when we talk about it outside of the current market slides, it makes total sense and we are all committed to it. When you actually start putting on those trades, a whole other side happens. For example, people are sometimes great at this in Demo Accounts. Then, the second real money is on the line, it is amazing how our self control totally unravels. I promise you that every time you break those rules, you probably also have a bank account that is nearing $0. I use the same strategy whether I am trading the DAXs, day trading, or a whole other market altogether. We may vary our time frames a little bit, but it doesn't matter what we are looking at, we always use the exact same methodology that we know will put the odds in our favor on every trade. I believe that you need to have one strategy that you can master for a lifetime. You must have the ability to change markets and time frames. I can easily bring up a Forex day trading chart or a stock in Google.com on a daily chart. Even though they are completely different, the exact same methodology applies. The key to my success is to have simplicity over a strategy, one chart, and one time frame to take signals. I learned this early on because I tried to synthesize multiple charts at the same time. I found that in real time it was next to impossible to execute the actual trades. In some strategies that looked good on paper did execute properly in real time. They were virtually impossible. Some trades take these tiny little profits and slip it into commission that you don't normally see when you back test start to eat up the entire result. I don't think you need multiple strategies for each market that you trade. Question: Do you think that you need multiple strategies for each market that you trade? Short: As I reflect over the last year, I personally feel that it is key to have a single strategy that you can use to move from one market to the next. I actually did that over the past year when I traded in 3 different markets. The Russell was a favorite of mine over the past 2 years, but, as many of you know, there was a changeover from the CME to ICE. That particular instrument did not trade well when it switched in 2008. I stopped trading for awhile and started to trade the DOW for a few months and did well with it. Then, I started to look at another market that is called T-Notes or Ten Year Notes. That is the market I am currently trading and having some success with. The point I want to make is that I could transition between each of those markets using the same method. I didn't have to relearn anything. I simply put up my chart and the time frame I was interested in looking at that I felt had the best trade profile for me. I was executing trades very quickly once I decided to move between those markets. As a mentor, I always tell my students that you don't want to be slow to make those changes. You don't want to make these changes inter-day. You want to do that with correct back testing and math analysis. The key is to be flexible. When markets change, and they do change, have the ability to have a single method to move between those markets. Troy Noonan: I agree completely. I remember when the Russell switched over from the CME's to the ICE and that was some of the most volatile market swings we have seen in history since September and October. Having a market system that was able to self adjust and re-calibrate itself on the fly in real time was amazing. We were actually able to benefit from those wild swings. Even though it was hard to get away from the Russell, which is a very addictive market, it was comforting to know I didn't need to change anything because I had a system. In all actuality, you are looking at a bar chart with price bars, buyers, and sellers. We don't have to worry about a system where the indicators are constantly lagging and only work on certain conditions in the market. We have a system that we can rely on because it self-tunes itself to that immediate current market condition. It's based on price movement. The indicators just support the signals that it's giving you. To make the switch to T-Notes, that I took along with Brian Short, was a no-brainer because it had the same bars on it, the same indicator set, the same signals to buy and sell, and I can feel confident that the trade I am looking at right now has been self- tuned by the system itself. This trade has just as much of a chance of succeeding as any other trade I have used with my method. Question: How do you know the right time to enter or exit a trade? Soberman: We rely on our methodology to give us dynamic targets and stops that are tuned to current market conditions. In early 2009, we are finding that the volatile nature of late 2008 has kind of toned down. Again, if you are trying to trade a system that has fixed targets and fixed risks, for example, the Russell - in the past I had a philosophy to trade 2 points exactly and risk 1.8 or 1.6. That was probably working at the time for the current market conditions most of the time. However, in October - November of 2008, it would have not worked at all. Ranges that were usually 10 points a day turned into 30 or 40. It wasn't unusual for the DOW to have an 800 point range. If you have a strategy that is trying to take 20 points and risk 18, that is literally a hiccup. It could be 5 seconds when the DOW was running 800 point ranges. We are back, a few months later, to more normal ranges. They are probably a third of what we saw in the fall of 2008. If your methodology is not dynamic and you cannot adjust to volatility, unfortunately, it will break down on you. You will not have long term success and you will land back in the position that you have probably been in many times. That is probably why you are reading this. For us, knowing the right time to enter or exit a trade is having a system or methodology that you have total faith in. Also, knowing that whether the trade works or not, I have a pre-defined point to stop risk, and a target. That way, I know I am going to stay with that trade no matter what. I don't expect it to work every single time; however, I know the odds are in my favor if I stick with my methods. Question: How do you discipline yourself to get out of bad trades? Short: First of all; what is the definition of a bad trade? How do you know, in advance, that a trade is good or bad? The answer is that you don't know. What you can do is rely on your method that you have learned and implement that. Along with that, you should do some back testing of that method so that you have the edge that the methodology is going to have in the market. That is the knowledge that you have at the beginning of every trade - that your method gives you an edge. It doesn’t matter whether that's a 65% edge or a 60% edge. I have gone into many trades thinking that it has no chance of winning. I put my thought process into that and think that I know better than the stock market does which way it is going to go. Much to my chagrin, that trade usually winds up being the winner. Likewise, when I think a trade has the best chance for success and that it’s an easy slam dunk - that is the one that will end up losing! In the end, none of us have any idea what that next trade result is going to be. The key is to stick to your method. Noonan: To me, the trade you shouldn't be taking is the trade that doesn't fit into your trade plan. It's that discretionary trade that we discussed. In my opinion, an ounce of prevention is worth a pound of cure. In other words, you need to be disciplined not the take these discretionary trades and not get involved in the first place. Soberman: I think all of us have beaten ourselves up over a bad trade. I blame the market, the trading gods, and I take it personally. I never think of it as being a bad trade as long as I took the entry when I was supposed to, I took my stop when I was supposed to, I didn't over-ride the strategy, over think it, or think I was too smart for the market. I find that it's almost good news if the trade is bad because I am that much closer to the set of winning trades. The only time I get upset with myself as a trader is when I am responsible for the trade losing. The only thing you can control when you have a trade is risk. I don't care how much you yell and pray, you are not going to make a difference in where the trade winds up. The only control you have is to have targets and records that are achievable. Question: Do you stick to your trade plan no matter what? Short: Yes, no matter what. We have something called the power of quitting and our idea is to get in the markets, get out, and get done. We don't take every possible trade that you can take during the day. We don't try to take Forex 24 hours a day. I don't have my system beating me or my pager going off at 2am when the pound/US dollar trade is setting up. When we are done it doesn't matter what follows that. I think everyone's trading plan should include what to do in certain news and market events that are outside normal. Still, those are all up to a trading plan. Soberman: I agree that you must stick to your trading plan. Also, be slow to change that plan. I have talked to many traders that are switching markets intra-day. They think they are sticking with the trade plan but they are not. That way, it can be slow. I think I have personally made more changes to my trade plan over the last year and I am always slow to do it. I never do intra-session. It's always over a week or two. That is after doing some thorough back testing to make sure that what I think I am switching over to be reinforced with that information. Noonan: I think you should have faith in your trade plan. Otherwise, if you can't stick to it, it's probably a message that you haven't done enough work creating it in the first place. The whole trade plan is supposed to be in place after you have done your due diligence and you are convinced that this is a winning trade plan. Only then will you be successful. Every time I haven't stuck to my trade plan, I ultimately wished that I did. The result has always been worse. The trade plan was there for a reason and would have produced the better result. Question: What is your money management strategy? Soberman: When we know our risk on this trade is less than our target, it is critical for us. I believe that you need to have a strategy that wins more than 50% of the time - minimum. There are strategies out there that, in the performance reports, only win 35% - 40% of the time that turn out to be very profitable because they go for very large targets. What I have found is that even if those systems are good, the traders are not able to stick to them over time. The reason is that you will hit such a large streak of losers that psychologically it becomes really challenging when that large streak of losses hits. In the end, I think you need to be at 60% to mentally hang with it and stick with the plan. I think if you can accept 60% or more and stay with it, that you will be 50% of the way there. I think the other part is knowing your target is larger than your risk. I think it's important to be able to have four trades and lose on 2 and win on 2 and actually have a positive outcome. That is also going to ensure that you stay with the methodology and stay with your trading plan. Question: What is percentage risk per trade? Short: We recommend, in whatever method you are using, to only risk from 1-3% at the most if you are a beginning trader. Why not have some success and get some confidence with whatever methodology you are looking at? Then, later on, you can escalate it. When we talked to traders, we found that traders with bigger sums of capital that they are risking in the market actually risked less on a trade by trade basis than those with smaller capital. These are seasoned traders risking only 1%. A new trader often does just the opposite with a small account and risks 5-10%. It should all be the other way around. Personally, I will risk one contract per $10,000 trading T-notes. That keeps my risk in the 2-3% range on each of the trades that I am looking at. Noonan: If you are trying to stick to a 2-3% risk you have to be adequately capitalized. It's hard to find a market where you can trade 1-3% when you have a small account. You are going to end up trading a market that is possibly too noisy and has too fast of a time frame. It may be hard to achieve that 60+% winning percentage. That is something that is a little trickier for smaller sized accounts. You may have to take a risk with a smaller account because you really don't have a choice. You have to be able to trade a market that has a winning percentage. Perhaps the risk per trade is greater in order to get that winning percentage. I would say the solution to that is not to over-trade and to have a more patient perspective. Maybe you are only taking one to three trades a day in the beginning. You let that percentage work for you over time so that you can slowly build your account up. I think you should pull in the reins and be less aggressive as far as the number of trades that you take each day. In summary, when all is said and done, you have to be comfortable with the risk that you are taking in any given trade. Psychologically, if you are not comfortable, you are going to have a hard time letting that system work for you and you are trading with scared money. Question: If you trade Forex, how do you handle or avoid the risk of fast markets? Soberman: This is a big problem area that we identify when doing coaching and mentoring work. Revenge trading is a trap we fall into because we want to make up our previous loss by doubling up with the current trade. Sometimes, the bad trade was your fault. Then, you feel the need to redeem yourself and your risk control goes out the window. If you haven't already made that mistake, you probably will. You will save yourself thousands of dollars if you take this to heart and don't let this happen to you. They will probably only work out about 1 out of 5 times. [...]... profitable In the beginning, you trade with the smallest possible position size Also, of the people we talked to, the ones with the larger accounts, the smaller the leverage that they are using There is a reason that one guy has that account They understand risk They take risk, but they control the risk You should be looking to build your account up so you can reduce that risk in your trade and not the other... going to be very interested in the Asian markets and trading the Japanese session hours Those hours are generally 6pm New York time to 11pm I would not be interested after that We always stress to our classes to avoid the chop That is when the markets really aren't being affected by the news They have their specific sets of hours and then are just choppy the rest of the time You will take loss during... moves the market We are not saying we avoid the news, we are just saying that you need to understand how the market behaves heading into the news which tends to be choppy and thin Right after the news, especially if there is any surprise to the announcement; it is sometimes it’s all over the map Sometimes it is a huge move, but it's completely non-executable Then, your risk control will go out the door... risk for trade Most traders, the bigger they get, the less they risk for trade For them, consistent results come out of not risking so much Noonan: It’s going to be different for every trader in terms of what they need to earn a living Also, a different skill set comes into place An analogy is that you trading account is the biggest jumbo jet in the world In order for it to get off the ground, it needs... failure Typically, you can focus on Forex the biggest of the big and leave it at that You might have some correlation, so you decide the Euro/US moves pretty similar to the US/SSF it's almost an inverse The Euro/US and the Pound/US are not really dead on but there is some correlation You might want to mix it up a little bit I think that another thing to realize with the Forex trading is to make sure you... depend upon the trade that you are in We never know the outcome of any given trade To make money trading is to make money over time The only way to make money over time is to keep trading and trading the edge that your system gives you When you reflect over that, you realize that you can't get emotional over the trade that you are in If you are, you will have the problem of taking another trade So then where... stool One of the legs in a 3 legged stool is critical Without one of those, the stool cannot stand The three legs of the stool in trading are: 1 - method, 2 - risk, and 3 - trade psychology So is it possible to learn a system to trade in a couple of weeks? Yes, I do You can learn the method in 2 weeks, but the method is only one part of 3 pieces critical to trading All of them play heavily into the trading... would it be? What is the easiest system to trade? Finally, what is the best system for trading minis? Soberman: These questions all fall into the same basic category People tend to move quickly between systems and strategies trying to find the next big thing We would answer the same way We all trade our methodology, The Universal Market Trader, everyday That is all that we focus on If there was something... Noonan: I would say that this is the most important issue of all Of the three legged stool, this is the one that bears your entire weight I've reflected on this from my conversation with other traders, and one of the things that helps me, is to remind myself why I am trading in the first place Most people haven't even examined that question You would be surprised some of the answers I've heard I am always... it should Short: Trading the news and Forex used to be one of the strategies to follow because the brokers used to guarantee you an entry price If you placed a stock price in on a buy just a little bit above the market and the news would hit, they would guarantee you a fill at that price They quickly ended up losing a ton of money on that so all those rules got changed In the fast market conditions, . that you have the edge that the methodology is going to have in the market. That is the knowledge that you have at the beginning of every trade - that your method gives you an edge. It doesn’t. if new traders could take down risk control, stick to their trading plan, avoid unrealistic expectations, and accept loss - then they are probably better off than 80% of the traders out there by the news. They have their specific sets of hours and then are just choppy the rest of the time. You will take loss during choppy trade. You will save money just by being smart about the