Trading Insights

Trading Insights

Trading Psychology

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Trading Psychology. It tells you what kind of trader you are.

If we really spent some time upstairs, between your left and right ears, what kind of thoughts would see and hear swirling through your head?

Trading psychology, as touchy and feeling as those words are, are detrimentally important to your overall success as a trader. There has never been in my life, something that required such deep introspection and careful consideration and planning. I've found myself so emotional at one point, that I was sitting in a corner of my walk in closet, in bitter violent tears, with my hand on my heart feeling my pulse and nearly hyperventilating at the thought of what I had risked trading only moments earlier. I'd made a decision that put my entire account equity at risk trading the emini S&P...nearly $15,000 in the heart of a FED announcement. If you don't think trading psychology is critical to your overall success as a trader, you're living in a delusional state. If your're one of the 10 people on earth that don't have an issue with trading psychology - the voices in our heads that drive our decisions all too often - congratulations.

I ask new traders that come to BackToTheFutureTrading.com a series of questions now, that help me determine some things about them early on in the process - things that they may never have considered especially if Trading Psychology was never really a focus of theirs. I ask them to look at a chart and tell me what they see. Do they see trend moves that went on forever, or do the reversals and counter trend setups stand out to them more clearly? Do they think the trades took too long to hit targets, or not long enough? Questions that help me understand who they are in their mental core - questions that most traders unfamiliar with trading psychology don't ask themselves until its far far too late.

I recently came across a very valuable link, to a free Trading Psychology personality test. 35 questions, the likes of whom you'll struggle to understand why you're being asked about in the first place. But at the end of the test, you start to see a pattern emerging, and in the free report you're sent, a picture of who you are - right now - as a trader. Something that helps you understand exactly what's going on in your mind, and why you do the things you do consistently. Trading Psychology, in a free report.

Go here if you'd like to see for yourself: www.tharptradingtest.com

I took mine, and when I was finished I thought - yeah, that makes sense, actually.

Sometimes an outside perspective is important with these things. People see things about us that we're unwilling to admit about ourselves. Trading Psychology is about understanding those strengths and weaknesses, and setting yourself up for success before you walk onto the battlefield each day with your account.

It's encouraging to know that there are other people out there like VanTharp that have put 2 and 2 together in a test that helps us drill down deeper into ourselves and work out all the cobwebs before we lose countless thousands in the process.

 

Trading Psychology and time cycles

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Trading psychology fascinates me. On the surface, it appears to be the simplest thing to do. See this signal - do this do that, right? But any veteran day trader will tell you - if they're honest - that there's inexorably more to trading the futures, forex, commodities, and equities markets than just seeing a signal and hitting a button.

One of the struggles that I see most new traders dealing with circulate around trading psychology, and over trading - where traders sit at their trading computers hovering over every bar and every tick supposing that they are microseconds away from missing the move of the day. They as a result begin to trade over and over and over again - anticipating moves that never materialize.

Having struggled with this trading malady myself - and being a student of trading psychology, I was fascinated to find this recently released quote from a New York Times article:

"...In its (very long) explanation of this phenomenon (Decision Fatigue), the Times reports that experiments have demonstrated a "finite store of mental energy for exerting self-control." Each decision you make and the more choices you make throughout the day, the harder it gets for your brain to continue to make decisions. The result is that towards the end of the day when you're low on mental energy, you're more likely to either give in to impulses or avoid making decisions altogether..."

No one has ever to my knowledge put the phrase "decision fatigue" into the trading psychology arena. And yet - when we read the above statement, we know existentially of its truth. How many traders have made thousands in the morning sessions, only to give it back plus some in the afternoon? (We should all be nodding our heads if we're honest about the truths of trading psychology).

Decision Fatigue studies like this one are powerful insights into our minds, our trading psychology, and how they affect our profitability as traders. As Jack Schwager put it in his book, "The New Market Wizards", "We has met the enemy, and it is us". Our minders show us how little we understand our minds - and our desperate need to fill that gap.

What I like most about trading the time cycles of the Flux is the appointment nature of the indicators. Time cycles and their studies allow you the mental freedom in trading psychology to take a break - and to plan your trades and setups. In between cycles, there is simply nothing to do but wait. To regroup. To refresh. There are no missed moves. There are only moves inbetween time cycles and time signals. Many traders say, "I know when to wake up at night, and when to sleep.", or, "I know when to get up from my desk and do something else, and when to be back to trade". These are important statements in light of trading psychology, and decision fatigue management.

I hope you'll take some time to study our time cycle indicators if you're not a customer, and if you are - that you'll continue drilling down deeper with your studies and your proficiency in this arena. Doing so is an investment in your trading psychology arsenal - I believe the most critical arena in trading altogether.

Trading in the Zone

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Listen to this quote, from Mark Douglas and "TRADING IN THE ZONE"...

"...The psychological dilemma that virtually every trader has to resolve is that you may be aware that the next trade is simply a trade in a series that has a probable outcome. Yet you’re still afraid to put the trade on and as such are susceptible to the fear based errors. This is due to our potential to view and interpret market information as threatening. This negative state of mind when you trade means there is a conflict between what you believe is the probable outcome and any number of other beliefs in your mental environment that are arguing for something else.
When you think in probabilities you believe that every moment in the market is unique or every edge has a unique outcome. When this is your dominant belief, your state of mind will be free of fear, stress and anxiety when you trade. If you believe that something will happen but you don’t need to know what it is, then how can the market information be threatening and painful?. You were simply right again.

Every moment in the market has elements of what we know (similarities) and elements that we don’t or can’t know because we haven’t experienced them yet.

Until we train our minds to expect a unique outcome, we will experience only what we know. The other information and possibilities will pass us by as unperceived, discounted, distorted or denied.

Once you truly believe that you don’t need to know and you think in probabilities there will be no reason to block, discount, distort or deny anything about the markets potential to move in a particular direction."

In case you haven't figured out - that phrase in red is what I believe to one of the most important elements of trading, as observed by my conversations with people day after day - year after year.

I may not be the best live trader in the world - but my experience as a clearinghouse for conversations with struggling traders is a unique one. You've maybe spoken with a dozen or two struggling traders - I've spoken with thousands. When you talk to that many people all trying to achieve a common goal you start to notice the similarities between those conversations. You take note of all of the things that people are confessing that they are stuggling with - as well as take not of what the people that are succeeding - are doing correctly.

Trading in the Zone is  one of those great clearinghouses of trader information. It's Mark Douglas saying - "look, I've spoken to enough people - and documented my own struggles enough, to have compiled a mass of similarities. I know enough about what not to do when trading - and what do to when trading - that you should stop, and listen and read".

Trading in the Zone is also one of those books that you probably only absorb 1/10th of the first read through. When you're reading about the zone that you should be trading in, and you start making lists of all of the challenges that are laid out - the new thought processes - and how you're generally failing miserable on all fronts - it becomes clear that this book - somewhat of a holy document - needs to be studied. Notes must be taken. Outlines created - and accountability instituted.

When I was first handed a copy of "Trading in the Zone" by a man I knew who traded, he handed me the book carefully and with the understanding that I was being loaned this copy - that I would be giving it back as soon as I was done with it. He was sincere in his loan, but stern in his understanding that he needed it back - that he probably referenced it quite often and I had a week or two to get the "jist" of the book before I was expected to pass it back over. I'll never forget how serious he was that I read "Trading in the zone", or how serious he was about getting it back from me.

What I love most about the Flux - and the timing cycles we study, is that it's almost cheating when it comes to the principles of Trading in the Zone. That book says you really shouldn't expect something to happen next, and that the next trade could be a very different set of circumstances. The next timing cycle though, and the predictions therein, are based on the fact that the markets do the same thing - over and over - like any other business in the world with procedures and routines. So while Trading in the Zone teaches that anything can happen (and anything CAN happen, don't get me wrong) the Flux tools and the timing cycle indicators that we've developed more or less indicate a very high probability that something IS going to happen. And when you see the conditions for that something start laying out  (stalling pattern, consolidation, double tops or bottoms, reversal bars, volume drying up) at the precise time you were EXPECTING the markets to turn - it's a feeling like no other.

The challenge then lays within constraining those events in a rules based trading plan. What do you do, when you arrive at that trading cycle time? What is your trigger? What is your setup? What are the conditions for your trade? What will you do when you see those conditions congeal? What amount of money will you risk? When will you take profits?

This is where the timing cycle indicators stop, and Trading in the Zone picks up. Ignore it, and these warnings - at your own peril.


7 principles of consistency

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Mark Douglas wrote, "Trading in the Zone", and was known for his seven principles of consistency - the 7 means of measuring if you were in fact "trading in the zone" or doing something else- usually at the detriment of your trading account.

The 7 principles of consistency relative to flux time cycle trading are especially important, I believe - because you are anticipating something happening, versus sitting at the computer and fretting over whether or not the very next candle will be a trade, or not. The Flux time cycle indicator drills down and says, "don't even bother looking for a signal here, now....walk away".

Douglas says that most traders won't create rules and plans because by doing so, they would be held accountable to a standard by which they could be measured. They would in effect be held responsible for their decisions in the constraints of their plans and trading rules.

Go through each of these seven rules, and you'll note a strong undertone of preparedness. There is a tremendous amount of work that the trader is exhorted to do LONG BEFORE THE ENTRY. There is work done in advance, which enables the trader to act effortlessly in the moment and trade in the zone when the signal comes into existence.

I was watching the markets today and couldn't help but notice that the Flux turning times - the midst of the market melt downs, were 70% accurate. Wait for the right time - jump in - and you were in the flow of the market immediately in the green, 7/10 times, across 32 signals.

I can't think of anything a trader can do, in preparation for a trade - that would benefit their confidence - as much as a time cycle indicator like the Flux.

I think the 7 principles of consistency are a great way to measure yourself - to reflect as a trader and discover if you are fooling yourself into believing your a trader - or acting like a real one.

 

The 7 Principles of Consistency:

1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept the risk or I am willing to let go of the trade.

4. I act on my edges without reservation or hesitation.

5. I pay myself as the market makes money available to me.

6. I continually monitor my susceptibility for making errors.

7. I understand the absolute necessity of these principles of consistent success
and, therefore, I never violate them

 

Time Cycle Indicators Do It Again

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Check out this chart from today's emini S&P (August 8th, 2011)

 

time cycle indicator for ninjatrader tradestation

time cycle indicator for day traders

 

Once again, I'm amazed at how just waiting for the right time - the repetition of the correct behavior pattern, produces such volatile movements in the anticipated trading direction. I'm also amazed how overlooked time cycle indicators are, especially when you consider that time cycle indicators help with a multitude of psychological issues that plague traders in every market and time frame. Getting into a trade too early - getting out of a trade too late. Not holding trading profits long enough, or moving stops and giving a trade room to breathe. And then the paralyzing trades where traders can't do anything but sit and stare at the screen.

Time cycle indicators like the Flux address these issues by focusing a traders attention on a specific time - forcing them to look at specific behaviors at those trading times. The time cycle will either present itself - and it's conditions (reversal behaviors, for example) or it won't. If it's repeating - you'll see the conditions repeat at that time and have the confidence to take the trade. If it's not repeating - you won't see any of the conditions of your setup and the trade should be walked away from until the next time cycle indicator time.  It's that simple. And the simple act of walking away from your desk when the cycle is over, is immensely therapeutic. You can't make a bad decision if you're not near a mouse to execute a trade.

Time cycles have redefined the way we look for trades. Are they cosmic forces that just move people magically to do things at certain times? Or are the markets - and the institutions that move the markets - bound by routines and behaviors like any other business?

Or is it a combination of the two?

Time Cycles in Day Trading with Market Chaos

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Once I started trading markets with Flux time cycle indicators and tools, when I started delving into the data and mining it for patterns that were either there or not - and testing their predictability moving forward - I stopped doing something that I was conditioned to do.

I stopped watching the news. Financial papers. TV (especially TV).  Econs? Phfsh....

I want you, for a moment, to allow your eyes to scan this photograph:

You know what's most interesting to me?

The fact that the dots - which represent time cycles that were known about 1 week before the actual moves - appear more often than not near actual moves.

When you know these times in advance- you begin as a day trader to anticipate changes in market direction. The time cycles end, and the price cycles end, right about the same time.

You'll see an emini Nasdaq trade above - one that I waited an entire NYSE session to get to.

A lot of setups came and went on my trading charts waiting for it. But as the time cycle approached - I almost watched the exhaustion and turn coming in slow motion. I could "feel" the momentum of the entire market dying, and shifting back downwards. And I was amazed that the time cycle indicator - predictive 1 week out into the future - was showing me the minute - to the minute - when that move should- and did- occur.

So as you look at those dots (non-photo-shopped, I Eagle Scout promise) and you start to see what happened at those times - 1 week before the time cycles were set to actually kick in - ask yourself the same question I asked myself 3 years ago...

"How on earth, is that possible?"

Unless of course - the news....the econs....the widespread "propaganda panic" is all just one giant smoke screen.

Something to consider as a possibility. Until then - keep checking in on our weekly webinars to see how you can harness these time cycles for yourself.

The Trading Watch...trading time cycles

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What is the coolest wrist watch you have ever seen?

There are literally thousands of unique designs and cool function in wrist watches today.

Much like trading indicators, but as a day trader in Stocks, Futures or Forex, wouldn't you love to have a watch that told you when the time was right to place a trade?

That is exactly how I relate to what the Flux Time Indicator does...when we are trading time cycles. It tells me when is the best time to look for the trade to occur.Whether you are a Swing trader, Scalping trader or Longer term trader, We all know about looking for the right price but what about the right time? Is this even really relevant?

Lets think back for a minute, its like me as a kid ,when I  just got my first wrist watch. After that glorious day, I knew when supper was going to be ready! No more guessing. Mom made supper at about the same time every day. No more playing outside until I had that funny feeling in my stomach, then running a half mile through the woods to get home, only to discover that either supper isn't ready yet, or I missed it and now all that is left are the scraps.

With the Flux Time Cycle Indicator, ( My "Trading Watch" if you will), I'm now on time for the trade when we are trading time cycles. What, no way you might say! I use this tool every day I trade, and teach classes on its many facets. Its alway neat  to hear the comments from most new users. For what seems like the first time in their trading life, they are  actually on time for the trade. No more chasing the trade, or jumping in just 3 minutes too soon, only to watch their stop get hit then, the market go straight to the target!

Now they know when its coming, and 'wear' it when they are trading time cycles, and  just like me when I was a kid, they can keep on playing until the time is right to watch for the trade.

Unfortunately its not available in wrist watch form, but if it were, that would be the coolest watch ever!

Time Cycle Indicator Addiction!

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Yesterday afternoon I was assisting a veteran Flux Time Cycle trader with a Ninjatrader platform issue. Good traders are not necessarily good computer techs! In our conversation (while I was working on his ninja) he laughed and said , you guys are like drug dealers. I was immediately taken back, What do you mean? I asked defensively.

He said, " I have been trading for a lot of years, and I've been good at it, and I have used a lot of stuff in my time, but this Time Cycle Indicator is the only one I can't seem to live without". "I didn't have it today when my platform messed up, and for the first time I realized how much I needed it".   I have to admit, I have never been compared to a drug dealer  before,  LOL.

Most day traders know "It" is there, "It" is always there. Some unseen force that drives everything, is a part of everything. You know its there, but you just can't put your finger on it. It is Time. Now to a new Flux trader, he  has a way to identify that force, and to track It. With that comes a newly found sense of power, and confidence. One that was not there before. I have to admit it is very fulfilling to watch the enlightenment and the transformation into a more confident trader.

From the things I have read, I guess its kinda like the first taste of a new drug. This transformation almost always goes the same way. First its disbelief, then amazement, then after a few weeks, traders cant seem to live without it.

Today 8/4/2011 the futures markets could only be described as down.Way down! The key to not only surviving the day,but being profitable through it, was timing. The Flux Time Cycle Indicator had us short from 10:17 this morning. Most of the day! How is that possible? No one could have seen this coming. No Trading indicator could have seen it with that kind of precision! Or could it?

Pre-Market analysis

The aftermath

In this mornings Flux Time Cycle  Training class, at 8am we drew a vertical line at the time of day we expected to see the E-mini's and 4 other futures markets turn.The Time Cycle points for the day, both major and minor, were known in advance. The drop today really was not much of surprise to most in the room.Most of them have seen this before. Of course it is always fun to see the new guys reactions when the market stops on a dime and reverses, right on time! The time we said hours before!

That initial reaction by the new Flux user when he sees his new Time cycle Indicator live on his computer screen can only be described as "priceless"!

LOL, I guess in some ways, we may be like drug dealers after all.............!

 

 

 

 

 

Futures Trading: A cautionary guide

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I came across an interesting search of "Futures Trading" results in the Google search engine today. It's one of those trading articles where I sort of scream at the screen and want to choke the person on the other side of it that wrote the original article.

Look at this quote from tradingfutures.biz:

"...Think about it : if it were possible to devise a system for trading profitably, the owner of that system would become almost infinitely wealthy, and the markets in which he traded would cease to operate as indicators of real value. It's just plain silly to think that there's some way you can varnish your toe-nails while a 'system' gets you rich. If their system worked, it wouldn't be in their interest to sell it. The fact is, successful trading requires sound judgement and always involves some degree of risk.

Examples of pseudo-scientific mumbo-jumbo that is guaranteed to lose you money are :

~ The notion that markets move in waves, whose motion can be scientifically predicted. This is a particularly popular one because "after all, you only have to look at any chart to see that such waves exist". Yes, but try predicting the level of any given wave at any given time and you will find it is as futile an exercise as doing the same thing with real waves on a beach...."

Boy, that sure sounds pretty researched and heart felt, doesn't it?

When writing about stop loss orders, that same author writes * the following regarding their opinion:

"...So yes, you need to have a stop loss order in place, but it needs to be a long, long way from your original position and its triggering should mark the end of your campaign. If you do it right, it will almost certainly never be triggered, to the chagrin of your broker and to your enrichment...."

Right there, I take everything the author has said, ever will say, or is thinking about saying - and I throw it out the nearest window of the tallest building I can run into and climb up.

Why Michael? Isn't he trying to help futures traders?

Why? Because it flies in the face of everything I've ever witnessed since I started getting involved in the trading community over 6 years ago.

I've seen people trade without stops. I've watched them lose the fortunes of friends, families, and church members that trusted them with their futures - the futures of their spouses and their families. When someone says to trade with huge stops - or not use them at all - they lose instant credibility with me. I think it's a criminal statement, after watching the futures traders' lives post account explosion. Go back and ask the guys who didn't have stops on 9/11 what they think of that statement.

Secondly - I've met and seen traders that do nothing but trade systems mechanically - day in and day out. I've developed my own futures trading systems from scratch that traded 1 time a day - that were profitable 94 out of 100 recorded instances. I've shared systems with other people and had other people share their systems with me. The truth is - trading systems and methods are universally accepted as a possible source of income. Read "the New Market Wizards" with Jack Schwager, and you'll see how 18 traders around the world all subscribe to this theory to one extent or another. If you don't start out trading without a methodology - you're doomed to failure. The idea that you come to the market every day, making "judgement" in the moment, is an equally horrifying statement to me. I'd love to introduce the author to a trader that I knew that lost $3,000,000 dollars trading the S&P, with $250,000 profit targets and stop loss orders. Having lost it all, "making judgement" they tried to convince me that they didn't need a system....that they were emotionally "in control". It was frightening to listen to her speak...

Last and not least - the author tries to "debunk" the existence of predictable cycles. I know - from my observation of the real world - futures trading or otherwise,  that time cycles exist. We wake up every day, to a room full of customers - to a trading webinar each week filled with people who were given the prediction times the day before - and ask the question, "was this market predictable, and if so, what percentage of the time?". Week after week - the numbers come back from the feedback chat box in the trading webinar dialog box. "60+%......70%...." or sometimes higher. If these cycles didn't exist, we'd be out of business by now. The trading community would have hung us out to dry on every message board and every trading forum online. We'd have been sued for sure.

Trading, day trading, swing trading....if it's forex, options, futures trading - whatever kind of trading it is - needs to be approached somberly and with great fear and respect for the industry. This is not a country for old men, or women. This requires a level of dedication and commitment to excellence far beyond any other industry I've ever been involved with. To throw up a web page that says the things these guys are saying is pretty outrageous - and it hurts to read it.

I'd love to introduce them to my friend...whose futures trading account got down to $250, and his broker let him trade with margin. His goal was $250 a day, using $250 a day - or 100% returns, daily.

Why would anyone share their futures trading system - or share what they're using to make money? Simple.  You meet a guy like my $250 friend....like the man who lost everything he, and his friends and family ever had - and it changes you. Keeps you centered - and convicts you to help anyone that stops long enough to listen.

* (taken from www.tradingfutures.biz.com)

Timing Indicators

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Timing indicators are a misunderstood class of indicators. If they're in NinjaTrader, or Tradestation, or MetaTrader, they can be easily overlooked because on the surface, timing indicators are not obvious like other lagging indicators used by traders in futures, forex, and the like.

I always tell people, timing indicators don't ask you to forget everything you've ever learned about trading the markets- but rather - they politely ask you to remember everything you've learned about trading the markets and applying that information at certain times each day. Instead of looking at head and shoulders patterns, double tops, double bottoms, or candle reversal patterns every minute of every day - timing indicators allow traders to sit and expect those patterns to recur at certain times of the day - allowing them to conserve emotional energy for the proper times.

What amazes me most about timing indicators, are their apparent disregard for news events, or outside disturbances like econs or reports. For example, look at this 60 minute chart on the Emini Nasdaq:

It's clear to see the cycles, ie the red and green markers, play out in the overall market movements. What scares most new timing cycle traders is how those times were pre-determined a week before those times were arrived at. Despite all the news - all the chaos and calamities - the cycles still kicked in.

The deeper we dig into these cycles, the more we see we have to learn and develop. It's been an amazing journey and I'd be lying if we said we thought we'd found it all. I'm glad to see that timing indicators are important to you - and we're looking forward to showing you what we've found and learned.