The Search for the Perfect Strategy
In my seven years of being involved in the world of trading, I have never met a fellow market speculator who has at some point in their trading journey not gone looking for the perfect set of technical tools or indicators. I honestly think this endeavor is a required rite of passage for anyone who hopes to become a consistently profitable trader of today’s financial markets, as we are often misled in the early stages of our trading education into believing that there is some magic formula or system which only a select few traders around the world are privy to. Also, when you combine this smoke and mirrors attitude with the simple fact that most market speculators are constantly damaged by their lack of emotional discipline, it really is no wonder why the vast majority of novice traders around the world endure disappointing results time and time again and continually search the internet for the ultimate answer to their questions.
Just like every other trader out there, I too have been down this path and it is not an enjoyable one to walk, in my opinion. Looking back, I made some huge mistakes in the early stages of my career, even after taking courses from professionals and getting myself the very best education I could. Was this the fault of my teacher or because the lessons were not good enough? I guess that at first, there was a small part of me that believed this was the case. I was so focused on making lots of money in the shortest possible time that I was blinded by the reality that I had been taught everything I needed to know, but I was simply failing to use these tools in the correct way. After sitting back and analyzing my trades and performance from a completely objective point of view, I noticed a damaging pattern in my trading: A lack of consistency. Let me explain
I was taught that the most fundamental aspects of technical analysis revolved around three key areas: Support (Demand), Resistance (Supply) and Trend. Now, while I know this to be true all these years later, at the time, I questioned what I was being told. In my head, trading had to be more complicated than that! How could just these three simple tools be the source of my future success in trading? I just had to believe there was more and I thought my questions had been answered, when I was later introduced to Technical Indicators. I learned all about Moving Averages, RSI, Bollinger Bands, Stochastics and Linear Regression, plus a whole heap more and finally I started to see where I thought the secret was hidden…
After applying a whole selection of these indicators to my charts, I sat back and admired my new chart, feeling satisfied that I was finally beginning to develop charts like a pro. It looked a little like this:
Figure 1
The funny thing was that while my charts may have looked impressive and useful, they were in fact highly confusing and told me very little about what was actually going on with price itself. My selection of indicators were there, or so I thought, to help me find my entry signals to take trades. However, I found myself taking random entries from various signals over and over again, while ultimately following no detailed plan whatsoever. You see, the more information you have on a chart, the more potential trades you have to take, be they low risk high reward opportunities or not. Also, with so many mixed signals on the screen, it then becomes tempting to take each and every indicator signal that comes along, resulting in absolutely no consistency whatsoever.
I found that I needed to strip back my charts and understand exactly what I was trying to achieve in my trading. All I wanted to develop was a clear and simple technique to enter the market which offered me no stress, objective rules and a healthy risk to reward ratio. By waiting for every single indicator on my screen to line up before I could take a trade, I was running the risk of missing out on opportunities altogether, as well as confusing myself and diverting my attention from the most obvious and objective trades available. Let’s take a look at a much clearer picture to find our trades, based simply on Support (Demand) and Resistance (Supply) and Trend:
Figure 2
This time around I have simply placed a 200 period Exponential Moving Average on the chart to define my trend. Then I have marked off my Supply and Demand levels which offer me decent reward to risk ratios of at least 3:1 or greater. If a level is hit in a downtrend (200 EMA sloping down), I will expect bigger moves from Supply levels and smaller from the Demand zones. If a level is triggered in an upwards trend (200 EMA sloping up), I will expect bigger moves from Demand areas and lesser moves from Supply. With the rules defined for my entries and criteria for targets, all that is left to do is to define my risk and trade management criteria. This is a lot more simple than having 6 different indicators on my chart, isn’t it? In fact, it is remarkable how much more we can see on a price chart when we actually have less on it.
So, what is the perfect strategy after all? Well, to answer this question I would say that it comes down to the individual trader and their own ability to process information and make a decision. I like to be able to look at a chart and know exactly where I will be entering a trade, where I will place my stops and where my eventual profit target will be. All I need is an objective reason to enter the market (Support or Resistance), a preferred direction for the trade (Trend), and my plan for profit taking and management of the position. The rest is simply in the hands of the market. Once you have these steps in place and the picture becomes clearer as to why you are taking a trade, you are well on the way to consistency and building your own perfect strategy.
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Your Ego Can Get Your Trading Into Trouble
By Dr. M. Woodruff ("Woody") Johnson, Online Trading Academy Mastering the Mental Game Instructor
Have you ever heard someone comment on another person's behavior by saying that they have a big ego? What does it mean? Generally speaking when someone is saddled with this label it means that the individual is perceived as conceited, self-centered, perfectionistic, having to always be right, having difficulty accepting criticism, self-absorbed or arrogant. Of course they may exhibit all or none of these negative traits, but more than likely they may have an inflated opinion of themselves that gets between them and healthy relationships; one of which being their relationship with the market as they trade. The person in question may be a good guy overall, it's just that they may be so caught up in self-protection (defense mechanisms that thwart an honest interaction with the environment) or self-promotion (inflated notions of one's importance over others) that they become distracted and begin to distort data. Often, the individual that suffers from ego inflation issues also has a part of themselves that is not only aware that there are issues, but actually attempts to override the self-sabotaging behavior that develops as an outcome of self-defeating emotions like anger, fear, anxiety, stubbornness and impatience. It's tantamount to having different parts of yourself show up in challenging situations that make mindful execution of the trade all but impossible causing impulsive entries, chasing trades, moving stops and other unwanted rule violations.
Don't you have to be mentally ill to have different personalities reside in your body? Actually, it is quite normal to have various "parts" of yourself emerge at different times depending on what is going on at the moment. If fact, these parts of the self speak different languages and see different things as well; which is why you may have wondered how you made a glaring mistake after becoming seduced by your illusions of what the charts were really showing in the wake of a loss. This kind of personal and emotional volatility can wreck your trading account. Similar to the market, personal volatility is a direct reflection of the emerging emotions of the masses as they trade furiously, impulsively, compulsively and at times capriciously. The market is continually sending messages; messages about volume, momentum, and volatility. But, those messages are best captured by first attending to your own volatility so that you can see the charts as they are.
The financial markets are neutral representations of all the hopes, fears, and decisions of everyone executing a trade. When you trade you slip metaphorically into the skin of the market and see yourself in its reflection. And, of course every blemish, character flaw and weakness that you have is in that reflection, because you "express yourself" while in the markets. The successful trader can "feel the markets" through insight and intuition that has been developed through countless hours of observing market charts; but she does not get lost in those feelings. The successful trader has an intimate understanding of the delicate balance between emotional intelligence, i.e., managing emotional volatility through protocols, routines and habits and tracking the mechanical data of the markets. They focus on doing the "right" things habitually (following trading plans, rules, money management and position sizing) as if their life depended upon it...and their trading life does depend upon it. In this way they set themselves up to get the right results habitually. They know that consistent successful execution is intimately related to mastering this process of focusing on what matters most. It becomes a Zen of trading by losing the ego attachment and using mind management tools that engage the subconscious to work "for" them rather than against them. This is accomplished by redefining the relationship to the trade. Your relationship to the trade becomes accentuated as in a business transaction with another human being; the objective is to be in the flow. Being in the flow means that you develop a detached interaction where you are not attempting to get each and every tick of a move, but on the contrary aiming to come away having executed well with a good return. To be and stay in the flow you must be self-aware and "watch" what you are doing. You want to activate your "internal observer" and this is accomplished by relaxing at every opportunity and creating the habit of "being in the moment; fully present and in the Now of the trade." In this way you can maintain a fierce focus on what matters most and promote a shift from fear, frustration, irritation, and stressful tension to relaxation, mental clarity, and self-confidence. Doing this you will be better positioned to do the "right" thing in the trade. There are many, many internal resources that you have, some of which you may not even be aware. Internal resources like for instance, the ability to discern chart details, see the big picture of the trade, initiate a mindfulness regarding supportive beliefs and others. But, it is very difficult to access and activate internal resources without first ensuring that your internal observer is online.
Activating the internal observer can be accomplished by doing the following:
Change your physiology, stand if sitting or sit if standing
Straighten your body
Take a good stretch
Take a few deep breaths, in this way you are initiating the parasympathetic nervous system.
By engaging the parasympathetic of the Autonomic Nervous System you dilate blood vessels and increase oxygen to the brain and muscles, slowing things down and initiating a "Relaxation Response."
When ego investment and emotion rise, trading becomes a reflection of the ego, in other words defensive reactions to neutral events and inflated self-seducing illusions that really distort reality. Overly-invested egos create a sort of delusion, and consequently, what you thought was a great trade was in reality a "fake out" or something that came from internal bias not the objective reality of the charts. For example, Jack, a novice trader, while in a position on the YM E-mini futures, violated his rules and failed to maintain a hard stop. It was on a day when the YM lost over 300 points. The second rule that he violated was to "think" that the ATR (Average True Range) had been breached and that since its average daily range was violated, it would "come back." The third rule he broke, after finally closing out of the trade for a significant loss, was to believe that increasing his position size and essentially "doubling down" would bring him back to break-even in another trade attempt. Now this is a prime example of delusional, ego-fueled thinking. The analysis was distorted by the emotional upheaval taking place after incurring the original loss.
So, your ego is not your amigo. You'll want to get the internal observer involved early and often by being self-aware and wary of ego driven tendencies that come from unsupportive thoughts and emotions. Trading with your highest and best interests in mind is critical to your success. This hinges on promoting a mindset that uses mental and emotional tools and techniques that are designed to shake you out of that self-sabotaging delusion. Remember, as you trade it is important to identify what part of you is showing up to trade your account. Is it the strong, healthy, grounded, centered and focused part; or is it the fearful, frazzled, and fragmented part that is torn by ego-driven thoughts and emotions? Monitoring your ego can keep you from getting your trading into trouble.
Written by Sam Evans, Online Trading Academy Equities, Forex, E-mini Futures, Commodity Futures XLT Instructor
After leaving University in 1999, Sam thrust himself into the media world, working as an executive producer and part-time presenter for London’s Capital FM. Roles in the record and film industry followed, where Sam conducted many promotional interviews and honed his presentation skills for nearly 7 years. With a strong desire to work for himself, Sam left the media industry behind and spent an intense 18 months studying to become a professional Life Coach, embarked on various property investments and gave in to his childhood fascination with the money markets by training to become a trader with Online Trading Academy. Since his graduation, he has been a full-time trader, specializing in Stock Index Futures and Forex.
