Last week we discussed a few rules about planning our trades to allow for a more mechanical, consistent approach to trading the markets. Being rule based allows a trader to follow a set of rules that have been back tested and written. This instills confidence in the trader to allow for immediate action when it is time. Let’s continue with the last set of rules.
Principal #6 – Don’t marry a timeframe
During the trading day it is very easy for us to get comfortable watching just one particular timeframe. If your timeframe is too short you will lose perspective on where the market may be trading in relation to some important longer timeframe levels during the trading day: for example, knowing where previous day’s high, low and close are, new swings on longer timeframes created during the trading day since your pre-market analysis, strong origin of moves from early morning resulting from news reports and knowing what today’s high and low have been. Switch to different timeframes during the trading day so you do not miss any of this important information. If you have room on your platform, leave a couple of different timeframes open at the same time so you can see them all at once.
Principal #7 – Morning or Afternoon trader
By studying your personal trading journal you should be able to tell whether you are better at trading in the morning or afternoon. In my opinion, the morning is the best time of day based on liquidity and true supply/demand in the markets. If you find that you are a better morning trader, then adjust your risk if you decide to trade in the afternoons. Perhaps trade smaller contract size or only take very high probability setups and don’t settle for anything else. My plan also states that I will not initiate a new day trading position during the last half hour of the trading day. This period is just filled with people trying to square up positions and trying to get back to even for the day. Another event at that time of day is that people with small accounts are being forced out of positions because their clearing firm knows they do not have enough equity in their account to hold positions overnight.
Principal #8 – Trade what you see and not what you think
When you place a trade make sure there is a setup and that the charts are confirming what you see. Too many times we start using the words “I think,” “maybe,” “What if,” and you can see the emotional pattern beginning to form here. We must stay in the moment when trading. Do not worry about what happened recently or what might happen in the next few minutes. All we can be sure of is what is happening right now! Thinking in any moment but the now can let fear and indecision enter your thoughts. This will cause paralysis when you need to execute your trade. This in turn makes you late entering your position because you are going to be looking for that extra confirmation.
Principal #9 – Trading in front of News is like gambling
We have all seen a news event come out that on the outside looked bullish, then a few minutes later the market sells off in a very unforgiving manner. There are just too many variables to try and trade off the news. Many large traders position themselves days before the report comes out. Once the news is out, the inexperienced trader is entering the market based on their perception of the news and the large traders are more than happy to offer their contracts to these people and book their profits. The liquidity in the market seems to evaporate for a short time after these major reports are released. Too many traders try and bracket these reports and take breakout trades from them. They soon find out that they are whipsawed from the news report with larger than expected losses due to slippage. Then the market finally starts to trend in one direction or the other. Let the news come out and the calm heads will prevail again after a short time. Then, while the gamblers are licking their wounds, you can identify your setup and take a well thought out trade and capitalize on the opportunity. Experienced traders will try to find price levels to fade the news report. By locating levels to sell at above the pre-news price and/or levels below the pre-news price to buy at prior to the report, we have a better chance of capitalizing on traders chasing the news.
Principal #10 – Stops are a Traders best friend
Learn to like protective stops! They are nothing more than a circuit breaker that will trip before the house catches on fire. You need these protective devices in the market to protect you against huge losses. Once you start trying to trade without a stop you begin to trade emotionally. All of a sudden the voices appear in your head asking questions about “What if this happens?” or “What do we do now?” We have all heard them; they are not good voices to hear when you need to be calm and collective. Forget about the stories of people knowing where your stops are in the Futures markets. They only know where they are because we place them just beyond obvious swing highs and lows. We should always place our stops in places that tell us the trade is not working, then being stopped out is no problem. We obviously would not want to stay long in a market if prices are making new swing lows against us. Trading is a probability business. The sooner we accept that one or two trades should not make or break us as traders the sooner we will become successful. By thinking in terms of probabilities you will realize that with each loss you are closer to a winner. For example, out of 20 trades done on a consistent strategy (same rules for all trades) you will find that you did not lose 20 in a row and you did not win 20 in a row. You probably had something like 11-9, 15-5, etc. The key is staying consistent. If we trade different strategies every other trade then we will never obtain this consistency or any kind of long term success as a trader.
Free Trading WorkshopThese principals may seem simplistic to some, but they are often overlooked and therefore cause inconsistencies in many trading accounts. Review these and perhaps you will find that there are a few missing in your trading plan. Rule based trading will make you a much better trader. There is no room for using emotions in trading. If you find yourself trading with emotions perhaps taking some time off will help clear your head. There is no need to try and trade through any kind of issues affecting your business of trading.
“Have patience with all things, but chiefly have patience with yourself.” Francis de Sales
Written by Don Dawson, Online Trading Academy Instructor
Don has been trading the futures markets since 1987. Students who want to learn how to invest or day trade find his futures courses at Online Trading Academy invaluable, and he shares the same knowledge about where to invest money in his Lessons from the Pros articles.
Don obtained his series 3 license in 1990. Soon afterwards he registered as a Commodity Trading Advisor with the National Futures Association and formed his company Majestic Futures. He has been a guest speaker on Technical Analysis at Johns Hopkins University and a guest speaker on the Business of Trading Radio Show in Washington, DC.
He continues to actively trade his personal account on a daily basis when not teaching for Online Trading Academy. His teaching method has been referred to as “down to earth”. He understands the student’s need for a structured environment in the early stages of their trading education. He uses humor to convey information in an accessible way.