ABOUT TRADING SYSTEMS

June 26, 2009 – 7:19 pm

When developing logic for trading system, most of the futures traders would quickly agree that there are inherent differences between long and short trading. Few differences that I observed over years of trading are listed below.

1. Many technicians have observed that uptrend is generally longer in duration than a downtrend a typical uptrend seems to last about twice as long as a typical downtrend. The most significant reason for the persistence of uptrend is that we have been doing the majority of trading in an inflationary environment. Thanks to Federal Reserve monetary policies that presume that any inflation is bad in spite of the Fed.’s best efforts. There will always be irregular periods of waning prices.

2. An uptrend is generally less unstable than downtrends. For example: Many years ago there were times when the onion market prices actually appeared to be going to zero. The price was so cheap that brokers could take delivery of the onions only to throw them away and sell the empty bags at a much higher profit. The long side profits appear to have unlimited potential. Rising prices serve to increase demand and facilitate the existing uptrend while the short side profits are limited.

3. An uptrend always tends to end in spikes while downtrends end in flat areas. There is no limit to how far prices can be raised. As the market reaches the bottom there are rarely huge positions remaining to be liquidated. Traders are attracted to bull markets and the liquidity increases as the prices rise. While the down side prices make the traders look for rising markets.

It is to be carefully noted that all the above points are only general observations relating to non-financial futures markets. Securities or financial markets are not looped in this category.

Having understood and analyzed the basic difference between rising and falling markets we need to improve the design of our trading systems. Here are a few of the accommodations that purchasers may have observed-

  1. 1. Few of our systems are designed only from the long side as we are using a multiple systems approach. Every system need not trade in both the directions. The long side is usually easier and more profitable. As long as our long system trade is out of trouble, we can wait for the uptrend to develop.
  2. 2. More long-side entries are made when designing a system that trades in both directions which results in more long trades than shorts. We are intentionally building in a long side bias.
  3. 3. Profits are often let out unknowingly when exit strategies in a system are designed. Short side profits are expected to be limited. On the long side we prefer to try and let the profits run.
  4. 4. It is absolutely meaningless when price levels do not make sense to go short. For example; sugar has traded as high as 63 cents per pound and as low as about 1.5 cents per pound. The risk is obviously much greater than the potential reward.

There are fundamental considerations like supply and demand that influence the trading characteristics. These fundamental issues shall be discussed in yet another bulletin.

Our learning from the article; it is always assumed that there is a good case for the long side of markets than the short side. Entries and exits do not have to be regular. Traders disagree on which side is best because the characteristics of long and short trades are different.

By TradingMentor | Posted in Articles, Automated Trading, Trading Systems | Tagged , , | Comments (0)

Trading tips

June 25, 2009 – 7:32 pm

There is no trader who can sit down in front of a screen each morning without a trading plan and tip to look at charts for trading, and make money constantly. Traders who always perform well have a trading plan. Make sure that your trade plan has definite rules.

Below are few trading tips that can also be an energizer for any trader-

  • Why trade – To make money although a successful trader takes this much deeper
  • What strategy – Trade plan should as detailed as possible when it comes to strategy
  • What Markets for trade – there are 4 major classes and many markets within them
  • How much capital is available – place your account sizes such that it lowers risk
  • How much time – time determines whether you should be a day trader, swing trader, etc.,

Each person’s goals, life styles, account sizes and personalities are very different. Once you get your trading plan completed however and you have a successful track record of six months of solid trading results, lock that plan up and never share it with anyone. Use it to build an incredible life for you and your family. Hold on to the edge you have worked so hard to attain. Be happy to share your knowledge but that does not have to mean giving away your strategy.

By TradingMentor | Posted in Articles, Technical Trader | Tagged , , , , | Comments (0)

Stress due to trade exits

June 25, 2009 – 6:29 pm

Frequent exits due to stress occur when traders stop out at a stop loss level, close the trade into high volume spikes, or attain predefined targets. All trades should have a stop loss in place. Some traders hold a mental stop while others place physical stops. Traders stay with the market as long as a positive trend exists, until a trend reversal stops them out.

Simultaneously trend reaches a climax illustrated by price movement on the charts. This moment everybody start to jump on board the trend, whatever the price, whatever the direction. Smart traders go against the crowd by closing positions into such spikes and they occasionally experience stress due to trade exits or probably not. Other traders prefer to set targets for their trades. Target levels are frequently set near the next resistance level for long trades, or support level for shorts. Sometimes targets are based on a multiple of a market movement, or swing, already apparent on the charts. Other times, targets are set at a multiple of risk with no particular reference to the chart. As a day trader, there are certain psychological aspects to the stress exit which are important. A day trader can usually get into a trade quite quickly at the open. However, the exit may not come for a long time. Indeed, if no other trigger has arisen, the trade may be exited in the last few seconds of the market session. Ensure to decide your way forward whether to use an exit strategy or choose a strategy that lets you walk away.

Most of the traders want to be liberated from staring the screen for hours. This is to avoid psychological stresses as the market swings up and down. To avoid stress unnecessarily set a target, a stop loss, and a market order to exit at the end of the session if neither of the other two orders works. Another idea is to set an automatic trailing stop loss of fixed size. The trailing stop loss order may be connected through an OCA (one cancels another) group to a market order exiting the trade at the end of the session if nothing else has happens to experience minimal stress due to trade exits.

Only those with practical trading experience will really understand, but believe me, the most stressful trading hours are those spent watching each market tick. Even if you are winning, you go through the torment of seeing large paper profits severely eroded during pullbacks. Sometimes, you surrender and take a small profit while it is still on the table, only to see price turn right round and race back up to new highs.

If you are a day trader, I strongly urge you to adopt an exit strategy that can be automated, so that your trade is left to work as planned without your being tempted to tinker with it. Come back at the end of the session and check your results for a minimal stress or even not.

By TradingMentor | Posted in Articles, Strategies, Technical Trader | Tagged , , | Comments (0)

Ways to Trading Performance

June 25, 2009 – 5:14 pm

The two key essentials to achieving trading success are having a trading plan and a positive expectation and consistency. Many traders who do not have the first essential in place are the main cause of their lack of trading success. Traders who are positive in expectation system find their execution consistent and challenging.

A trader is so diverted by opinion around outcome and money. They do not have enough focal point on the key mechanism of executing their trade. Similarly traders who are low in self-confidence fail to perform their trades and grab opportunities when they surface. There are few ways to enhance the trading performance.

A trading performance system comprises of 5 essential components:

a)       Monitor – watching the markets

b)       Spot – spotting a trading opportunity

c)       Enter – enter the market, place the trade

d)       Manage – management of the position

The trader concentrates on the process of each of the 5 components. The trader needs to ensure that each of the 5 stages is in relation to their trading performance. Essentially they then evaluate their trading performance against the quality of their execution of the trade. The trader should assess his performance by questioning himself with ‘How well have I traded?’ instead of ‘How much money have I made!’ This is a powerful one trading performance tip that can bring lot of changes. By developing these essential areas and shifting the mindset to ‘flawless execution’ will find an improvement in the quality of trading performance.

Confidence, Focus and Discipline are the areas that can take away non performance and enhance trading performance.

Confidence

  • Profitable Trading Strategy – Positive Expectancy
  • Check your capability before trading – Analyze if you are a beginner, novice, competent, expert, master and trade accordingly
  • Know your strengths, potential and interests before trading

    • Focus

  • Focus on quality of each stage of the trading performance enhancement
  • Aim to control the possible rather than impossible
  • Thoughts about the future and past will not help while executions

    • Discipline

  • Help yourself with a pre-trading homework for better trading performance
  • Ensure you trade when you are at your best state of mind
  • Take suitable threat. Any high threat will put you in high emotion, fear and anxiety.
  • Take actions at appropriate times for better trading considering the benefits of trade

    • As we all know that no quick fix solutions vests to become a better trader. But your trading performance can always be enhanced by implementing consistently practical and proven strategies.

    By TradingMentor | Posted in Articles, Technical Trader | Tagged | Comments (0)

    Time Based Trading Part 2

    June 25, 2009 – 4:00 pm

    All traders are on borrowed time not knowing that there is a disaster waiting to happen. Unless a right step is taken to prevent the impending disaster, the situation will be a disaster. The primary goal of trading should be to diffuse the bomb before it explodes causing damages especially in a time based trading. The only way to diffuse the situation is by slowly building a foundation of knowledge and experience.

    Newbie traders get lucky and make some quick profits. That money is not utilized properly to buy time and set forth to learn the methods but they jump back for more money. What happens to these kinds of traders is that they will either slowdown to learn or go even pick up pace to recover losses and finally end up dissolving the money from their account. This particularly happens in a time based trading with miracles.

    Make the best when miracle hits you:

    1. Acknowledge you got lucky, admit it was a gift
    2. Put yourself on probation for at least one trading day to get your mindset back to normal
    3. Start trading smaller size with tighter filters
    4. End the trading day early and on a small profits

    Negative reinforcement is an effective constant reminder of what you shouldn’t do and it is easy to implement. Taking a break from the action is only a temporary band-aid. If you haven’t built your foundation of knowledge you are still on borrowed time. If you don’t take the time and make the effort to build a foundation, you will once again find yourself in the chasm.

    In a time based trading a strong or weak market is irrelevant to a trader. Sometimes miracles and losses overlap but not always. All you have to do is just preserve your capital and your spirit levels for a long run.

    By TradingMentor | Posted in Articles, Stock Market, Technical Trader | Tagged , , , , | Comments (0)

    Back testing and Data Mining

    June 25, 2009 – 1:06 pm

    Backtesting and Data Mining are techniques that are influential and worthy if we use them in the approved manner, however traders often exploit them. Therefore, we’ll also explore two common pitfalls of these techniques, known as the multiple hypothesis problem and overfitting and how to overcome these pitfalls.

    Backtesting is just the procedure of using chronological records to experiment the act of some trading approach. Data Mining involves probing through data in order to establish patterns and find probable correlations between variables.

    The Multiple Hypothesis Problem

    Let’s presume that we backtest the approach against ten years of chronological marketplace data. The results are not very encouraging. Conversely, being violent and stumble traders as we are, we decide not to give up so easily. What about a ten day moving average? That might work out a little better, so let’s backtest it! We run another backtest and we find that the results still aren’t stellar, but they’re a bit better than the 20-day results. We decide to explore a little and run similar tests with 5-day and 30-day moving averages. Finally it occurs to us that we could actually just test every single moving average up to some point and see how they all perform. So we test the 2-day, 3-day, 4-day, and so on, all the way up to the 50-day moving average.

    Now certainly some of these averages will perform poorly and others will perform fairly well, but there will have to be one of them which are the absolute best. For instance we may find that the 32-day moving average turned out to be the best performer during this particular ten year period. Does this mean that there is something special about the 32-day average and that we should be confident that it will perform well in the future? Unfortunately many traders assume this to be the case, and they just stop their analysis at this point, thinking that they’ve discovered something profound. They have fallen into the “Multiple Hypothesis Problem” pitfall.

    Overfitting

    Overfitting is a category of setback of the above problem. In overfitting we first look at the past and then build a single complex hypothesis that fits well with what happened.

    Not likely, but we could always keep altering the model and taxing the approach in diverse samples (out of sample testing again) to see if our performance improves. When we stop getting performance improvements and the only thing that’s rising is the complexity of our model, then we know we’ve crossed the line into overfitting.

    Conclusion

    Data mining is a method to use our chronological price data to propose a feasible trading strategy, but that we have to be aware of the pitfalls of the multiple hypothesis problems and overfitting. The way to make sure that we don’t fall prey to these pitfalls is to backtest our strategy using a different dataset than the one we used during our data mining exploration. We commonly refer to this as “out of sample testing”.

    By TradingMentor | Posted in Articles, Statistical Analysis, Stock Market, Strategies, Technical Analysis, Technical Trader, Trading Systems | Tagged , | Comments (0)

    Trading needs patience

    June 25, 2009 – 12:41 pm

    SUCCESS is in great demand for all traders who take a first step in their career. Most traders feel unsure and uneasy initially. They expect success overnight failing to understand that trading needs patience. Any beginning trader does not plan on failing. Many beginning traders never consider failure as one of the possible outcome of their attempt. It is only on the first loss or first series of losses that traders begin to feel a sense of urgency and desperation. And to add fuel to the fire of losses they see their money rapidly disappearing before their eyes that can be even more distracting.

    Beginning traders and many experienced traders believe that their short-term objectives must immediately be met failing to understand the benefits of trading in patience which is actually better. On one hand you are urgent in your feelings that you must succeed. This sense of urgency causes you to put a lot of pressure on yourself. That pressure can cause you to make some serious mistakes when a trade is going against you. On the other hand, you subconsciously know that trading can’t be all that easy. You know from reading, studying, and hearing about other traders, that even though you are experiencing losses, if you are persistent, ultimately you will become a successful trader. Others have done it, why not you?

    If you want to succeed in this business, you have to be tolerant in trading. Because sometimes trading successful takes a lot longer to achieve than imagined when first looked into becoming a trader. Some traders take many years of disappointment before they finally become successful. Only those few who never give up tend to achieve success. All businesses experience losses. I cannot think of a single one that can escape them. Yet losses in trading seem to loom larger than losses in other businesses. I believe it is because in trading the responsibility for losses all fall on you, the trader.

    In the long-term, any individual trade is not very significant. At any point in your trading career you have to avoid placing too much importance on the outcome of a single trade. You must not allow yourself to feel badly about yourself when you lose, or feel good about yourself only when you win. Strive to keep your emotions and your self-image separate from your trading. Doing so takes effort, but it is an effort that pays off in the long-run. If you allow yourself to feel confident and successful only when you win, losses can eventually destroy your image of who you are. Keep in mind that even the most seasoned traders have losses and went through a test of patience of trading.

    An experienced trader knows that in trading, there are more things beyond your control than there are things within your control. Realizing that trading is an art form, and not rocket science, helps you to have the right perspective on each single trade. When patience is coupled with proper risk and trade management, losing or winning on a single trade is not going to make or break you.

    Instant success has mental and emotional advantages, especially for a beginning trader. Realize that it requires patience to become a successful trader, just as it can take long to become successful in any other business. You need time to build your trading skills. You need time to acquire experience in the market. Experience and skill ensure that, over the long term, you will become consistently profitable. Until such time as you are able to paint the big picture, it is crucial that you manage risk and manage trades so that what happens with a single trade has little impact on your account balance. The experience of trading over the long-term allows you to learn how to deal with adversity and to build up the skill-set you need to trade in a variety of market conditions. Time also enables you to develop as an intuitive trader, one able to “feel” the market.

    By TradingMentor | Posted in Articles, Professional Investing | Tagged , | Comments (0)

    Technical Analysis: What you need to know before you start charting

    June 25, 2009 – 11:15 am

    Technical analysis is the study of price data and statistical indicators that are created by market movement. Market activity demonstrates the course of supply and demand. This supply and demand is an indication of ideas and opinions translated into human behavior and exclusively, herd mentality. Therefore, technical analysts would squabble, price patterns and indicator signals can be categorized based on chronological data with a realistically high expectation that they will occur again at some point in the future. Technical analysts focus on the herd mentality and how it affects the individual.

    TA is based on using patterns that have formerly cropped to forecast the moves of the prospect no two patterns are ever accurately the same. How can they be when you list the variables that decide price action: trading methodologies, the number of contestants, the participants themselves, order sizes, market liquidity, and the list goes on. Technical analysis is self-fulfilling. If a price prototype emerges it is not as though every technical trader defines precisely the same entry point and pulls the prompt at exactly the same time or the market would not function. Price would jump instantly causing massive slippage and incomplete fills and then subside as traders took their profits. The opposite of this would of course be true if technical analysis was deemed as a poor method of analysis. With enough technical knowledge, a robust trading formula and practical pattern recognition you have a strong basis for a profitable edge. The fact that traders use different entry techniques, price patterns, technical indicators or no technical analysis whatsoever means that there is just enough self fulfilling prophecy present to give technical analysis profit potential.

    Moving away from the idea of the self-fulfilling foretelling is the study of market psychology and herd mentality. Your skill to read this is an integral part of trading. Technical analysis is intended to give us a means to define this psychology and the consequential market action in the form of price or indicator patterns.

    There is constantly a place for fundamental analysis in trading, even if this analysis is as essential as knowing when data will be released. In just the same way that technical traders react in a different way to the same price chart, fundamentalists will react differently to the same piece of news. Market reaction to fundamental news can be unpredictable and violent and the resultant price action will add another variable to the potential success of technical analysis.

    Technical analysis can be used on all time frames. The universal consent is that the most significant price patterns and indicator set-ups are the ones that occur on the longer time frames, such as daily or weekly charts. It is the short-term price action that that paints the long-term picture and the long-term picture that has a determining effect on short-term moves.

    By TradingMentor | Posted in Articles, Technical Analysis | Tagged | Comments (0)

    A Beginners Guide to Spread Betting

    June 25, 2009 – 8:23 am

    Financial Spread Betting means to put a ‘bet’ on a financial tool increasing or decreasing. Spread betting is becoming progressively more accepted with investors and traders. The process of opening a position is to place a spread bet. The distinction is that opening a spread bet position means that you trade or invest in any of the instruments accessible to you without ever taking physical ownership of them. An elementary distinction in spread betting as apposed to an open market order is the amount you deal in.

    Shorting
    To trade during a bear market or an IPO, limitations are placed on short positions. This is either because brokers have no shares left available for shorts or the swap has proscribed shorting. There are no such limitations when it comes to spread betting.

    Financial Incentives
    Tax benefits are coupled with spread betting but there are also other financial incentives. Spread betting firms charge no commission, and exchange fees do not apply. Spread bet firms make their wealth from the spread they charge.

    Trading Platforms
    Spread bet firms have invested profoundly in their online trading platforms. These programs comprise live streaming quotes, free live charts, news wires and order tickets featuring stop, limit, OCO, market and CRB (controlled risk bets that act as a guaranteed stop loss) orders.

    By TradingMentor | Posted in Articles, Derivatives, Stock Market | Tagged , , | Comments (0)

    History of the Forex Markets

    June 24, 2009 – 11:37 pm

    The foreign exchange, FX or forex market first arose in ancient Mesopotamian times. Royal palaces and temples were used to store harvested commodities which in turn created the need for revenue. This revenue was used for transfers to those who made the deposits and to third parties. The very same banking and receipt business were used in ancient Egypt. Revenue were often used to reconcile debts with priests, tax collectors and exchanged with traders. During the Medieval period, paper bills replaced coins as the currency of choice which made foreign exchange much easier. At this point things remained comparatively stable in the World of foreign exchange until the First World War.

    At the end of WWI there was a short period of massive currency speculation. This World recession effectively killed any growth in FX assumptions as disposable income was at a premium. Until the start of WWII, the British Pound Sterling was the World’s most famous currency. At this time neither the United States nor its Dollar Currency had suffered this diminishing campaign or the strain of War on domestic infrastructure. The result was the Bretton Woods Accord.

    All other currencies are pegged to the dollar at a certain rate. It was outmoded by the Smithsonian Agreement. The Smithsonian Agreement tried to accomplish where Bretton Woods had failed. Not long into this agreement, Europe made its first attempt at breaking free from the Dollar dominated system. In 1972 Europe formed the European Joint Float. Member nations included West Germany, France, Italy, the Netherlands, Belgium and Luxembourg. This agreement was very similar to Bretton Woods but with a larger band for rate fluctuation. For the first time since WWII there was a ‘free float’ system in place. The value of each currency is now governed completely by the laws of supply and demand. Large banks, private companies and individual speculators are all active participants in the Forex market. The Internet boom and the increasing ease of access to foreign exchange has further increased participation, especially that of individual speculators.

    The European Economic Community (EEC) established the European Monetary System in 1978. A rate variation band of 2% was initiated. Bretton Woods and Smithsonian agreements, central banks were mandatory to uphold this band. The fiscal attack was so strong that the BOE deemed currency regulation too costly and withdrew from the European Monetary system. The official currency of the European Union (EU), the Euro, was launched in 1999 with coins and banknotes issued in 2002. Current member nations are: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The Euro is administered by the European Central Bank (ECB) which has the authority to set monetary policy over all of its member states. The Euro is now one of the most heavily traded currencies in the World.

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