Trading in the Zone. Huh? What zone? I thought I was trading in my office....there's a zone?
The following principles are taken from the “Trading in the Zone” by Mark Douglas. I refer to it's teachings constantly in our video series, "Basic Training for Traders". If Trading was a faith, and it had a bible, I believe it would be Mark's book.
Here they are in numerical order:
The 5 Fundamental Truths of Trading:
1. Anything can happen.
2. You don’t need to know what is going to happen next to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.
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.
In "The Disciplined Trader" for example, Mark Douglas points out that typical traders often avoid creating principles and rules, because they simply do not want to take responsibility for the results of their trading. They like the mystery and intrigue of the markets - of thinking that they have some input on what the markets are doing when they trade. They enjoy the working out of it all, taking their best guesses and going against the big boys head to head. They have something to talk about in the golf cart on Saturday - something to share at the dinner table after the movie. They love sharing their opinions in chat rooms, and being asked their opinions by others - the camaraderie of it all.
None of this has anything to do with actual trading.
So print these rules out - and get serious about your profession.
When time indicators and price indicators intersect it's a very remarkable trading setup.
Gann spoke about the confluence of those two universes - stating, "there is a definite relation between time and price".
When the time indicators in the Flux generate a signal, it's based off of thousands of bars of analysis - no small feat. That small green or red dot signifies a distillation of many movements. The computer is in essence saying, "this dot is here, because this is usually when the market goes up, or down. Now. Not 6 minutes from now. Now. Time indicators are great in that sense.
Price indicators are generally okay - but when you do the same data mining on price as you do on time, the answer is more meaningful. Instead of looking at floor trader pivot indicators, or murrey math lines, you're looking at or asking the question, "where has price been reflected in the past?" to your price indicator. The FPC accomplishes that task in the Flux toolset - and brings back a line to show you where those major reflections have occurred in price, over and over again.
Look at this chart from today's AUDUSD:
See the intersection of time (green) and price (red line) above?
Think about the psycological implications of the time indicators, and price indicators, converging here.
You are less prone to risk more - as it should go up - now. And not go down, much lower. The red line serves as a backstop - a launchpad. The green dot serves as a countdown.
We light the rocket, and stand back, and expect a move. It's not so much a guess as a logical expectation of a behavior pattern. When we light the rocket - it usually goes up.
When we see a green dot, above a red line, it usually rises (price).
Most traders aren't using any time indicators, and focus mostly on price indicators.
As you can see from the above - not paying attention to these repeating behavior patterns in time is a self-induced blind fold.
The information can be found, and known, and applied pragmatically.
This morning in the live training room, we were discussing what price based indicators actually do for us, and how so many of the ones in the stock "list" really didn't do much to give us a heads up on the market.
They all told us what it had done, but none could project what it should do. Even when loading the amazing Fibonacci tools, there were as many ways to look at them and opinions on what they meant as there were people in the room.
At one point I took all my Flux timing indicators off of the chart.
It looked like a hundred mile long stretch of desert highway glaring back at me from the monitor.....not very appealing!
I could see candle stick patterns, and market structure, even a few price patterns, double tops, W bottoms etc., but none of them gave me any insight as to the next bar forming on the chart, and what it was likely to do.
Then one of the traders in the room said it looked like I was "trading naked", and to be honest, after having the Flux for so long, that is exactly what it felt like.
It made me realize just how important the timing indicator has become to me, and how powerful it really is.
To see a bare chart, and even put on a few standard trading indicators, Stochastics, MACD, Pivot levels - it was still not the same.
Without that text on the chart glaring at me, telling me the next turning point was coming in 22 minutes, I felt lost. To be honest it was a little uncomfortable.
I am very thankful to have this powerful tool, and this timing indicator. It's not an 'end all', or a 'holy grail', but it definitely makes a huge difference in how I see the markets.
I don't think I could trade without it anymore......and feel naked when it's not there.
I received an email a few days ago from a trader overseas that distressed me somewhat.
The email more or less expressed that this trader had blown through her savings, her credit cards, and her trading accounts.
She had a few thousand dollars left in her account, and pending some living expenses, would have less than $500 available for food.
I wasn't sure what markets she was trading....if she was watching the EURUSD, the emini S&P, or Crude Futures - but I certainly sympathized with her situation.
She was desperate, clinging to the last few inches of the trading rope - and finally stumbling on a vendor that cared enough to talk about the darker side of day trading.
And so I sat down to write her an email, expressing my concern for her and most particularly, where she had traded herself into. A death spiral.
I went on to explain that I hadn't met a trader that had traded themselves into those circumstances, and traded back out of them successfully. I didn't know anyone that traded with an account as small as hers was now, and successfully handled the stress from the reasonable draw downs that were sure to ensue. Lastly - the stress of trading to survive when a trader had never been profitable was a Herculean task. And again - I'd never seen it done.
I asked her to explain her methodology to me...what her setups looked like - and what her general profitability was. I was trying to ascertain if she even had a methodology - or like most traders - was drawn into the spider web of fast profit vendors that pushed their plug-in-and-play systems to the waiting hands of naive people. I know one trader actually that paid $2000 for a "MACD CROSSOVER SYSTEM". We both laughed at that point in the conversation - remembering that we've all been there.
I came to find out she didn't have a system. She was biased by what she had heard on TV and read in the papers. She wasn't taking longs for such and such a reason, or wouldn't take trades on certain days in certain directions because of what so and so had told her. It was crazy trading - no rhyme or reason to it. Straight newbie discretionary trading.
All she wanted to see, was a few Flux charts for later in the week, so she could compare her charts to our signals.
Now, I did the math really quick. After food - she had negative $1500 to pay for the Flux tools. Not a healthy sum.
But that wasn't the really disturbing part.
In a follow up email, she confessed that she wanted the charts sooner if possible, as she had a limit order sitting in the market on the Emini S&P.
I lost all but the last breath in my body. After everything - she was still trading live.
When I pressed her on this trade she confessed, "I'm addicted".
It's easy to get addicted to trading - or the idea of it. For poops and giggles, I went over to the largest trading company's website. Let's call them "FadersInternational".
I went to their Blog. -click-
The blog was a series of client's success posts from the room.
"MADE 50 TICKS TODAY IN 5 SECONDS!!!!"
"UP 14% TODAY!@!!!"
....and so on.
You tell me.....is that an honest, and accurate portrayal of trading - or a silver lined spider's web designed with one purpose and one purpose alone?
We've all been where this woman has been. I've seen things that pain me to talk about.
In the end, I'd like to think that you do traders disservice by not trying to talk them out of trading live, especially without the fundamentals in place.
I want to shake people sometimes and say, "you need to stop, now".
Most times I'd rather shake the other vendors - press their faces into the pages of the emails we get - the cried for help at the 9th hour with nothing left but rent money and mayonnaise sandwiches. I want to ask them how they sleep at night and look themselves in the mirrors they bought with money from people like this lady.
It's not all profits and playgrounds. Trading, is the hardest thing I've ever seen people try to do.
I don't think I'm going to send this lady charts. I'm going to tell her that she should close her account out, take a break - and walk away.
Build up a savings account, and try again in a year, with fresh ears.
I'm pretty sure she won't listen to a word I'll say, though.
One of the things I hear a lot in our webinars, relates to news events.
Most Forex traders want to know how this or that reports affects cycles that are for all intents and purposes, known about and locked in a week before they potentially play out. They don't have futures and forex trading software that can handle that, or look for that. Market timing cycles are a mystery to most people.
Take a look at this AUDUSD chart from today (5 min).
I couldn't tell you what the news was today. I honestly have no idea - I've been busy writing these posts for our blog.
But what I found interesting to the technical analysis and trading of this forex pair is simply this - the majority of the cycle times pushed the market in the direction that we were anticipating the market to go.
What's even more interesting to me on this chart, is how the AUDUSD double tops at 8:30 this morning, near a major fractal pivot line, at the time we were expecting a sharp down move.
We then move into the 10:00 reversal ot the long side, with support beneath us.
Then the AUDUSD travels up to the next large FPC resistance area at 1.0710, lo and behold, a Flux turning time - double tops, and drops back down to structural support.
The long time cycle kicks in....the market drifts down to the thickest FPC line on the screen for the AUDUSD today...1.0693. And what does it do there?
Up.
Think about this next time you're trading the Forex.
The times that the market turns - and the prices that the Forex pairs will turn at, may be carved in stone - determined - before that market ever opened.
Waiting for the TIME cycle (dots) to intersect with the PRICE clusters (Fractal) results in a completely uncorrelated set of indicators, and a higher probability of the trade moving as it has in the past at that time and price.
WD Gann spoke about it in his writings 100 years ago - and the same market cycles are playing out real time today - uncovered by the power of our personal trading computers.
I am amazed that people who trade forex pairs, or the futures markets, don't use predictive indicators in their trading software arsenal. Most people are content to use indicators that lag in their NinjaTrader or Tradestation suite of tools. Predictive indicators, as evidenced above, not only provide a statistical trading edge - but an important emotional one as well.
It was good news in the AUDUSD forex pair today. We'll see how it plays out moving forward...
I never used to do any technical analysis on the Emini S&P when using the Flux time cycle tools until other traders started asking me to look at the higher time frames. The technical analysis software of the Flux allows me to look at both ranges of the time frame - but most of the time - I never look at the large ones. I am short sighted, admittedly, this way.
Once I started looking at them, I've honestly had a heck of a time looking at the lower time frames.
There's something cleaner about the market movements, and less noisier in the 60 minute arena. The technical analysis is just cleaner there - and I like that.
Look at some things on the chart with me and see if you see them for yourself.
Remember, the technical analysis of these cycles were known about a week in advance.
That means - like a week ago - I could have told you about the bottom at 1:00 yesterday.
Does that weird you out when you're looking at this chart? It used to make me itchy - my brain would melt.
Now, when I do the technical analysis on my charts, I use the Flux indicators 3 important ways.
First - I look for the closing price of the trend marker (see the larger of the colored dots).
Notice how the price reacts very violently to that price (white lines, green/red lines).
It's as though the big guys are making a decision about that price - a level that usually had no importance to anyone else watching the markets from the outside in. The technical analysis of the Flux software picks it out though through the data mining...
But that dot plots - and the closing price of that candle becomes a battleground support and resistance level.
Notice what the very next candle did on the last 4 Flux Trend markers.
It closed "above" the price. Even when we were expecting a down move.
Green - close up -------flier.
Red - close up ------drift up
Green - close up--------flier
Red - close up--------you can see the actual trade.
Even though the powerzone marker was a "sell"...even though it appeared at the high of the move, which is a perfect short setup - I know on the higher time frames especially to wait for a close below that zone price (red line)
You can see how the institutions tested that price as they were trading around it.
You can see the trading intention to close below it, but the inability to get beneath and stay there. And off prices went.
That line - that price - the price that no other traders knew was even important - tells you a lot about market intention.
This trade may turn around and fall 1000 points. But the pattern has been a cycle of close above and run.
The candles sitting on this "secret pivot" like birds on a wire. . .
Until it closes below, there is nothing weak about this market, and the institutions have to play their hands.
I get a mixture of phone calls, emails, and skype chats each week. People from different walks of trading life that want trading education to learn how to trade, learn how to trade better. People that want to learn technical analysis for the indices, forex, stocks, or commodities - or just add more advanced techniques or indicators to their already successful trading styles.
Learning how to trade and finding a good source of trading education has to be the absolute hardest endeavor that I've watched people take on. Learning to trade is completely different from any other career, in that trading requires you accept losing days as positive occurances in your life, so long as you followed your trading plan, rule for rule, trading execution by trading execution. To be able to stand up at the end of the day, walk over to your mirror, look in it and say, "Good job", even when your minder says "NEGATIVE DOLLARS" is unlike any other profession.
Can you imagine any other job that required you pay your boss money, as you were punching out on the way to your parking lot?
It's insanity. And yet - my phone continues to ring with people from all over the world wanting to learn how to trade - looking for good trading education - and learn technical analysis, or enhance their already profitable day trading or swing trading techniques. They range from the people who confess having lost it all - having next to nothing left - who are on their last breath - to the people with millions in several accounts who have reached the pinnacle of their success. As you can imagine, there are about 10 people of column "a" to the column "b" traders.
Most people that are just starting out learning to trade - whether it be the emini S&P, the EURUSD, or Crude Futures, all make the same fundamental mistake. They believe that if they only had the right tools - the right trading system - they would be great traders. I think I've fallen into that mind trap once or twice on my trips to the home improvement big box stores around me. I think, "If I only had that saw...I could build a beautiful dining room set out of oak for my wife". I require constant reminding that the drill or the chisel does not make the master - it is the master who makes the tools sing and shine. It's no different when learning how to trade - and I enjoy my place as a trading educator.
I'm uniquely positioned as a tools vendor - selling indicators for MetaTrader, Tradestation, and NinjaTrader. I get to talk to traders from across the entire spectrum of success. I'm intimately familiar with certain patterns of failure - why most traders fail - as well as the patterns of success - why those five to ten percent of traders who make money - actually do it. After about 3 years of these conversations, the traders that are making money all share the same "bio".
1. They were trading 2-5 years before everything "clicked" and they became successful
2. They blew out 1-2 accounts before becoming successful
3. They follow a trading system that is uniquely matched to their trading personality
4. They follow a relatively simple system - typically between 1-3 indicators, no more than 2 or three charts.
5. They've adopted one technique - one little simple "thingy" that they've noticed - that they love. Something they've noticed over the years that they love to watch - that no one else "gets".
6. They spent 10,000 dollars or more on "trading education"
It doesn't matter who I talk to - I reference that list in my mind, and ask the following questions when a new trader wants to learn how to trade,
"What market do you feel "comfortable" in? "
"What time frame do you feel "comfortable" in?"
"Are you a trend, counter-trend, support and resistance, or scalping trader?"
"How long do you feel comfortable in the market? 1 minute....60 minutes....6 days?"
When people ask me how to learn how to trade, I always go back to these questions - which annoys some, to be honest. They think I'm avoiding the question. Or they'll ask how profitable I am, and what system I'm using. I have to remind them of a classic trading paradigm - that however I trade, or don't trade - it bears no importance to what you'll do, or what will work for you. I could give you the rules to any system - and if it doesn't match any of the above criteria - you'll crash and burn hard.
It took me a long time to discover these patterns of success, and failure. To discover where the best sources of trading education were. It's an ongoing process, and sometimes I amend the list. But for the most part, people that want to learn how to trade, learn technical analysis, or inquire about honing what they were doing - need to be reminded that the tools, are just that - tools. However new and exciting the Flux indicator set is - the trading plan - and the absolute dedication that trading plan - is the underlying foundation of success.
There are more powerful things to learn in the "self help" section of Amazon.com, than in the "Learn to Day Trade" section, unfortunately.
One thing I advise people to do - something they can do right now - for free.....trade a system continuously for 1 week.
Trade something free - and in Sim. Trade a candle stick pattern. Trade a moving average cross. Trade a break out pattern.
Pick something simple. Apply 3 -5 rules to the setup, and trade it every time you see it for 1 week.
Until you can do that consistently - people have no right to move on to the next step, where real cash comes into play.
Until you begin to reform your mind to understand that persistence - not profits, are rewarded with serotonin ... and that your trading plan, and not your minder, is to be watched and followed, than no system however profitable, will benefit any day trader or small investor.
Are you up for the challenge? Pick a unique setup...a unique set of market conditions....and trade them in sim.
Write up a small trading plan. Identify the market, the hours, and the conditions you will trade.
If you're left with a question that sounds like this, "What should I do now/here?" than your trading plan is incomplete.
You should know exactly when and why you are going to do something in the markets. If you're confused, then you didn't define your rules enough.
Mock system:
Emini S&P
9am to 11:59am
3 minute time frame
Trade long when 50ma crosses 100 ma
Target 1, 2x ATR
Stop, 1x ATR.
Move stop to BE once target 1 is reached.
Target 2, trail 2 ticks below 100 MA
Keep track of that for 1 week's time in an excel sheet, or in a chart that you hand draw.
If you get through the week - following all of your rules - whether or not the model made money - reward yourself.
For ever trading plan execution that was sucessful - give yourself a reward. Begin to build "trading muscles" in the right places...
Trading is the hardest profession I've ever seen anyone attempt to undertake. It's time we were honest about what really goes into it, and stop telling everyone they're just one more chisel from becoming the next Master Carpenter...
History, has some uncomfortable but exciting things to say about predicting market movements.
WD Gann, who was reportedly over 85% accurate in his trading during his lifetime, said something very curious towards the end of his career.
He said,
"TIME is the most important factor in determining market movements and by studying the past records of the averages or individual stocks you will be able to prove for yourself that history does repeat and that by knowing the past you can tell the future. There is a definite relation between TIME and PRICE. Now, by a study of the TIME PERIODS and TIME CYCLES you will learn why tops and bottoms are found at certain times and why Resistance Levels are so strong at certain times and bottoms and tops hold around them."
WD Gann also said,
"Mathematical science, which is the only real science that the entire civilized world has agreed upon, furnishes unmistakable proof of history repeating itself and shows that the cycle theory, or harmonic analysis, is the only thing that we can rely upon to ascertain the future."
...and then,
"Every movement in the market is the result of a natural law and of a Cause which exists long before the Effect takes place and can be determined years in advance. The future is but a repetition of the past."
These were pretty bold statements for WD Gann in his day and time. He had no access to computers of any kind - no calculators within reach. And yet, after years of study and hand calculations, he was able to uncover an order and rhythm of market behavior patterns - clearly enough to trade profitably nearly 9 times out of ten.
If you flash forward some 60 years, we discover Welles Wilder, the creator of the RSI indicator, the ATR indicator, among many other fundamental technical indicators that millions of traders around the world use today. A trading and technical analysis giant - like WD Gann.
When presenting his experiences with something later referred to as "the Market Delta', Wilder opens his statements this way:
"...Those who know me well know that I am not given to vain statements or careless exaggerations. What you are about to read is true ... every word of it."
We then see market charts, like this one:
The blue boxes on the top and the bottom of the chart, are the dates and times that his system predicted the actual turn of the markets. The circles on the chart are where the markets actually stopped, and turned.
Wilder - a mathematician like WD Gann, recognized that there was more involved here - something deep and staggering in it's hidden nature.
To validate his thoughts, he hired a mathematician to calculate the odds and statistics of the probability of the times being as accurate as they were. Here's what he reported afterwards:
"I asked a mathematician to make the following calculation.
If there is not perfect order in the markets, what are the chances that One could know in advance that T- Bonds would make the highs and lows (in high/low rotation) as shown on the chart? The answer is one chance in 322 billion! To be exact, 1 in 332,687,692,541 that the turning points on the chart could have been known before they happened. "
"...For all twenty-five commodities, which include over 200 years of observing the Delta phenomenon, the average accuracy for all Intermediate-term points is as follows:
[1] 51 % of the time the projected Delta turning points will occur within two days of the projected day.
[2] 68% of the time the projected Delta turning point will occur within three days of the projected day.
[3] 81% of the time the projected Delta turning point will occur within four days of the projected day...."
I want you to keep one thing in mind - both of these men accomplished these findings without the aid of a modern day - personal trading computer.
Welles, had access to one of those computers we read about in history books - the ones that filled spaces the size of your living room. Computers with less power than the simplest of cell phones, and some watches made today.
And so three years ago, when we first turned on the Flux data mining tools and went searching for the behavioral patterns - it was an extremely exciting opportunity. Imagine if Wilder or Gann had access to a Quad Core, I5, or I7 trading computer. Imagine if we could cut their learning curve down from years to months to minutes? What if we could find the patterns in the markets - analyze thousands of historical data bars and prices in a matter of a minute - and see for ourselves if these outrageous claims were in fact valid after all this time.
And so, we turned on our tools and asked our computer a very simple question - are there any time based cycles in the market you're about to analyze for us?
We knew what a cycle looked like. We knew what noise - or junk - looked like. It was an all or nothing proposition.
And we clicked on the mouse - and let the processor start crunching data.....here's what came back:
We practically fell out of our chairs.
There they were. Waves. Cycles. Up. Stop. Turn. Down. Stop. Turn. Up.
But were they truly predictive?
The cycles are known as far out as a week in advance. 7 days.
Wilder said he could plot a daily chart out 20, 30 years into the future. Would the same theory hold 7 days out?
So we went back and had the computer plot a marker where the cycles had been forecast to stop, and turn. Big dots for trend reversals...small dots for momentum reversals.
And then we had our Welles Wilder moment. It's like we were watching WD Gann laughing on our screens...
Remember, the dots are what happened after the fact. Like the round circles on the Market Delta pages.
Do the majority of the markers appear at actual highs and lows of actual market price action?
Yes.
Three years later, we've studied equities, forex pairs, futures markets....commodities and bonds - you name it. 30 tick charts up to 30-60-240 minute charts. Cycles that last a few minutes out to cycles that last a few days - and the results are always the same.
500 customers and growing - trading every market and every trading methodology known to man. People are fighting back against the institutional trading computers and the big money players - harnessing the power of their trading computers to analyze the markets like we think Goldman Sachs and other financial juggernauts are doing.
I wish we could spend a few minutes with Gann, or with Welles, and show them what we've developed. I can't help but think they'd laugh and say, "Well done, boys", or "Yes sir, that's exactly what I was thinking when I was writing my thoughts down...". It's fun to speculate.
The good news, you don't have to lay out $30,000 for Welles' book. Or spend 7 years attempting to decode Gann's secret knowledge. You can load your historical data into the tool set, hit your left mouse button, and watch the results come back on your screen in less than a minute - for as many markets as you want to analyze or trade.
Take a minute to watch our free product demo. Reading about it is one thing - but seeing it for the first time - I envy you guys. I'll never forget that day, and I hope you'll have the opportunity to see it and experience it for yourself.
Have you ever considered that in life that there are many things that have stark similarities? Lets consider this one....
I am a hunter by nature, and enjoy it as a hobby as well. I relate to the world of day-trading much like hunting. This may sound a little Odd, but lets consider for a moment, the parallels.....When I hunt, I use certain specific tools, designed just for hunting....just like day-trading.....
There is a thing called a game camera, it takes pictures of deer, and gives me the time and direction that the deer typically arrived in .In day trading I have the same tool, it is called the Flux Timing Indicator, it tells me the time and direction that the market typically arrives in...
When I hunt, I usually climb a tree and sit in what is referred to as a tree-stand, this stand gives me a better viewpoint of the surrounding area, and a stable platform from which to hunt.When I am Day-trading, I use the Ninjatrader platform, it allows me to clearly see the markets ..The chart gives me a better vantage point on the market than just a market analyzer alone...
In hunting I use a Bow, this tool helps me engage and propels an arrow toward my target. In day-trading, I use a chart trader tool in Ninjatrader, it is how I place my order to engage the market......
In hunting, on my Bow, I have a sight,( much like a Scope on a Rifle...) it helps me point my weapon in the right direction.In day-trading, I use the Trendstalker indicator which helps me see if the trend has shifted and helps point me in the right direction.....
When I hunt, I often see and have to cross fences to get to where I am going. I understand that a fence can be climbed, or gone around, but it will take more effort,or more time to do so.In day-trading I use the Flux FPC indicator, it shows me where the fences are in the markets, and I understand that when the market typically reaches one of these fences, it take more effort to cross, or more time time to go around.....
In Hunting, I often see many smaller deer that are shoot-able, and edible and these keep the freezer full.I don't often see that really Big deer, it comes along much less frequently than the others....In day-trading, I usually see lots of smaller trades, they make the daily profit and only occasionally see the really big one that comes along.....
Consider friends, that what we do in the day-trading industry is no different than any other, the biggest difference is how you approach it in your mind.If you are afraid of loss, then it is no different than me being afraid to climb the tree into a deer stand, I can still hunt, just like you can still trade, we both will have more challenges to be successful.
