Wisdom From Various Classic Books

[idaxtrader 10]

Firstly, I would like to thank Brownsfan for maintaining this candlestick section. Its really a great place to find out practical information about the application of candlesticks.

 

This month I have decided to re read Nisons work in a very careful manner. I thought it would be a good idea to post a few nuggets from his book as I progress with my reading. My purpose of this is to help fill the reality gap between the theory of candlesticks and the end of month results to my account. By now almost everyone is familiar with the basics of candle sticks but even with this knowledge most still struggle with actually extracting decent profits on a consistent basis using this method. My goal to identify and remove the hurdles that may obstruct a trader applying this approach. I would greatly appreciate any form of interaction to this thread, not so much about your success but where you may have made a misstep and the resulting lesson learned. Trading is nothing more than trial and error and then refinement. The more errors contributed to this thread the more growth to everyone.

 

Here's the first nugget from Nisons Beyond Candlesticks book.

 

"A single candle by itself is rarely sufficient reason to forecast an immediate

reversal" (21)

[idaxtrader 10]

When you cannot see the state of your opponent, you pretend to make a powerful attack to uncover the intention of the enemy. This concept, as related to trading, is one of the reasons a spring is so important. 57

 

 

In effect, these traders act like the aforementioned "moving shadow," testing the battlefield by entering a large order to try and break support (or resistance).For example, if a large-scale trader places a sell order as the market gets near support, their sell order may be enough to drag prices under the support area. Now, this trader, as a "moving shadow,,, will now learn about the underlying strength of the market. If the market fails to hold

under a broken support area and forms a spring, these "moving shadows,"(i.e., the sellers who were attempting to probe the market), now

have learned about the tenacity of the bulls and as a result may decide to cover their shorts. 58

[idaxtrader 10]

Although this generally means that the bearish engulfing pattern is more bearish than a dark cloud cover, and a bullish engulfing pattern more

bullish than a piercing pattern, it is equally important to see where these patterns emerge before deciding which is more important. For instance,

a piercing pattern that confirms a major support area should be viewed more likely as a bottom reversal signal than a bullish engulfing pattern

that does not confirm support. This vital aspect of viewing the candle patterns in conjunction with the overall technical picture will be discussed

in depth in the next chapter. 76

 

 

Eight to ten record sessions are so important in Japan that they have been described as being "the bones of Sakata's body." The meaning of

this expression is that just as the bones, or skeleton, of a person's body are its foundation, so are record sessions the foundation or essence of

the Sakata charts. 122

 

 

A book that I had translated states that, "Action that ignores the condition of the market is only asking for a loss and an ambush encounter." This picturesque saying (using the typical military analogy so common in Japanese technical analysis) means that you must consider the overall market condition before trading with the candles. Otherwise, you may be in for a "loss and ambush encounter."129

[idaxtrader 10]

Effective candle charting techniques require not only an understanding of the candle patterns, but a policy of using sound, coherent trading strategies and tactics. It is unfortunate that some traders who know about the candle patterns often ignore such tactics. 129

 

"The Side that Knows When to Fight and When Not to Will Take the Victory" 133

 

"wait for time to ripen, waiting for just the right moment is virtuous, a patient mind or spirit is essential. 133

 

 

There will be times when you should not release the trigger. For example, without an attractive risk/reward ratio at the time that a bullish or bearish candle signal emerges, the trade should be ignored 133

 

quickly and effectively adapting to a new market environment, is a vital element to successful trading. 142

 

 

If a candle pattern emerges, does that mean that a buy or sell signal is automatically given? of course not. As I previously discussed, you should not base a trade on a candle pattern in isolation. You must firsi determine the overall technical picture at the time the pattern forms. 147

 

How you trade with candlesticks will depend on your trading philosophy, your risk adversity, and temperament. These are very individual aspects. 149

[idaxtrader 10]

I thought I would post some of my notes while I read REMINISCENCES OF A STOCK OPERATOR.

 

 

 

Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore.

 

My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I'd have been right perhaps as often as seven out of ten times.

 

What beat me was not having brains enough to stick to my own game.

 

But there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his. play an intelligent play.

 

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall

Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.

 

It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.

 

My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.

 

I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game.

 

I can't tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way.

 

Their specialty was trimming suckers who wanted to get rich quick.

 

I had to make a stake, but I also had to live while I was doing it.

 

I was twenty when I made my first ten thousand, and I lost that. But I knew how and why, because I traded out of season all the time; because when I couldn't play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form.

 

And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!

 

No diagnosis, no prognosis. No prognosis, no profit.

 

The average chart reader, however, is apt to become obsessed with the notion that the dips and peaks and primary and secondary movements are all there is to stock speculation. If he pushes his confidence to its logical limit he is bound to go broke.

 

The game of beating the market exclusively interested me from ten to three every day, and after three, the game of living my life.

 

I couldn't afford anything that kept me from feeling physically and mentally fit.

 

I was acquiring the confidence that comes to a man from a professionally dispassionate attitude toward his own method of providing bread and butter for himself.

 

It taught me, little by little, the essential difference between betting on fluctuations and anticipating inevitable advances and declines, between gambling and speculating.

 

He knows all the don'ts that ever fell from the oracular lips of the old stagers excepting the principal one, which is: Don't be a sucker!

 

It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

 

That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.

 

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations.

 

Without faith in his own judgment no man can go very far in this game.

 

It was that I gained confidence in myself and I was able finally to shake off the old method of trading.

[BlowFish 10]

I thought I would post some of my notes while I read REMINISCENCES OF A STOCK OPERATOR.

 

Now you're talking probably read that 20+ times

[idaxtrader 10]

I had been gradually approaching the full realization of how much more than tape reading there was to stock speculation. Old man Partridge's insistence on the vital importance of being continuously bullish in a bull market doubtless made my mind dwell on the need above all other things of determining the kind of market a man is trading in.

 

There was not so much need as I had imagined to study individual plays or the behaviour of this or the other stock.

 

Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn't it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities.

 

I always had or felt that I had to make my daily bread out of the stock market. It interfered with my efforts to increase the stake available for the more profitable but slower and therefore more immediately expensive method of trading on swings.

 

You see, I had observed certain facts but had not learned to co-ordinate them. My incomplete observation not only did not help but actually hindered.

 

But if he didn't profit by his mistakes he wouldn't own a blessed thing.

 

But I can tell you after the market began to go my way I felt for the first time in my life that I had allies -- the strongest and truest in the

world: underlying conditions. They were helping me with all their might. Perhaps they were a trifle slow at times in bringing up the reserves, but they were dependable, provided I did not get too impatient.

 

The market would not be right for me to trade in for a while.

 

I lost because I traded in and out of season, every day, whether or not conditions were right. I wasn't making that mistake twice.

 

However, the real joy was in the consciousness that as a trader I was at last on the right track. I still had much to learn but I knew what to do. No more floundering, no more half-right methods. Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money.

 

I was no longer betting blindly or concerned with mastering the technic of the game, but with earning my successes by hard study and clear thinking. I also had found out that nobody was immune from the danger of making sucker plays. And for a sucker play a man gets sucker pay; for the paymaster is on the job and never loses the pay envelope that is coming to you.

 

It marked the successful ending of my first deliberately planned trading campaign. What I had foreseen had come to pass.

 

But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class; I had at last learned to trade intelligently in a big way. It was a day of days for me.

[idaxtrader 10]

A loss never bothers me after I take it. I forget it overnight. But being wrong -- not taking the loss that is what does the damage to the pocketbook and to the soul.

 

The message of the tape is the same. That will be perfectly plain to anyone who will take the trouble to think. He will find if he asks himself questions and considers conditions, that the answers will supply themselves directly.

 

Therefore the thing to determine is the speculative line of least resistance at the moment of trading; and what he should wait for is the moment when that line defines itself, because that is his signal to get busy.

 

It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against, many things, and most of all against himself -- that is, against human nature.

 

When a man makes his play in a commodity market he must not permit himself set opinions. He must have an open mind and

flexibility. It is not wise to disregard the message of the tape.

 

A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask it for reasons or explanations.

 

It would not be so difficult to make money if a trader always stuck to his speculative guns -- that is, waited for the line of least resistance to define itself and began buying only when the tape said up or selling only when it said down. He should accumulate his line on the way up. Let him buy

one-fifth of his full line. He is wrong temporarily and there is no profit in being wrong at any time. The same tape that said up did not necessarily lie merely because it is now saying NOT YET.

 

It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.

 

He did not stick to his own proved system. That's the trouble with most of them,"

 

The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear.

 

The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

 

It is absolutely wrong to gamble in stocks the way the average man does.

[Tasuki 10]

cute quote from Steve Nison on one of his training videos:

"The Japanese have a saying, 'Fear does not ride out on a donkey.'"

[idaxtrader 10]

The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.

 

 

That is, he looks far ahead instead of considering the particular shot before him. It gets to be an instinct to play for position.

 

He was no novice in Wall Street, but he was thinking of the market from the point of view of the newspaper man and, incidentally, of the general public. The price certainly ought to go down on the news of inside selling.

 

The point I would make is his habitual attitude toward trading. He didn't have to reflect.

 

I am fairly immune from the commoner speculative ailments, such as greed and fear and hope. But being an ordinary man I find I can err with great ease.

 

I wish to know my own limitations and habits of thought. Another reason is that I do not wish to make the same mistake a second time.

 

"What are you working for then?" "For the commission and the record," he answered. "What record?" "Mine." "What are you driving at?"

"Do you work for money alone?" he asked me. "Yes," I said. "No." And he shook his head. "No, you don't. You wouldn't get enough fun out of it. You certainly do not work merely to add a few more dollars to your bank account and you are not in Wall Street because you like easy money. You get your fun some other way. Well, same here."

 

"I know exactly what I am doing. That's all the secret there is.

 

But he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.

 

Of all speculative blunders there are few greater than trying to average a losing game.

 

To learn that a man can make foolish plays for no reason whatever was a valuable lesson.

 

If you know much about the average customer of the average commission house you will agree with me that the hope of making the stock market pay your bill is one of the most prolific sources of loss in Wall Street. You will chip out all you have if you adhere to your determination.

 

In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.

 

What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking more than to place an even-money bet. Because he is prepared to run quick -- say, stop his loss at two points when all he hopes to make is two points -- he hugs the fallacy that he is merely taking a fifty-fifty chance.

 

I was sick, nervous, upset and unable to reason calmly. That is, I was in the frame of mind in which no speculator should be when he is trading.

 

A man must know himself thoroughly if he is going to make a good job out of trading in the speculative markets. To know what I was capable

of in the line of folly was a long educational step.

[idaxtrader 10]

In every one of them I lost money. It served me right, because I was trying to force the market into giving me what it didn't have to give to wit, opportunities for making money.

 

More than once in the past I had run up a shoe string into hundreds of thousands. Sooner or later the market would offer me an opportunity.

 

I convinced myself that whatever was wrong was wrong with me and not with the market. Now what could be the trouble with me? I asked myself that question in the same spirit in which I always study the various phases of my trading problems.

 

I thought about it calmly and came to, the conclusion that my main trouble came from worrying over the money I owed. I was never free from the mental discomfort of it.

 

As I studied the problem I saw that it wasn't a case that called for reading the tape but for reading my own self. I quite cold-bloodedly reached the conclusion that I would never be able to accomplish anything useful so long as I was worried.

 

To take the cold-blooded, dispassionate attitude toward the game that comes from the ability to afford a few minor losses such as I often incurred in testing the market before putting down the big bet.

 

Must also know himself and provide against his own weaknesses. There is no need to feel anger over being human. I have come to feel that it is as necessary to know how to read myself as to know how to read the tape. I have studied and reckoned on my own reactions to given impulses or to the inevitable temptations of an active market, quite in the same mood and spirit as I have considered crop conditions or analysed reports of earnings.

 

But I sat tight and instead of listening to my loud-mouthed hopes or to my clamorous beliefs I heeded only the level voice of my experience and the counsel of common sense.

 

As a matter of fact I wasn't the same man, for where I had been harassed and wrong I was now at ease and right.

[idaxtrader 10]

I suppose, was the need to satisfy the public's insatiable demand for reasons for each and every price movement.

 

Was invented as an easy way of supplying reasons to those speculators who, being nothing but blind gamblers, will believe anything that is told them rather than do a little thinking.

 

She knew how I felt about stock speculation as practised by outsiders.

 

There are some who can't resist the craving and always look forward to those jags which they consider indispensable to their happiness.

 

Men do not take tips because they are bally asses but because they like those hope cocktails I spoke of.

 

Somebody asked him if making money in the Bourse was not a very difficult matter, and he replied that, on the contrary, he thought it was very easy. "That is because you are so rich," objected the interviewer. "Not at all. I have found an easy way and I stick to it. I simply cannot help making money. I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon."

 

Investors are a different breed of cats. Most of them go in strong for inventories and statistics of earnings and all sorts of mathematical data, as though that meant facts and certainties.

 

He believed in asking his own questions and in doing his seeing with his own eyes. He had no use for another man's spectacles.

 

That is, it did not behave as it should have behaved to make me feel I was wise in buying it.

 

The training of a stock trader is like a medical education. The physician has to spend long years learning anatomy, physiology, materia medica and collateral subjects by the dozen. He learns the theory and then proceeds to devote his life to the practice. He observes and classifies all sorts of pathological phenomena. He learns to diagnose. If his diagnosis is correct, and that depends upon the accuracy of his observation -- he

ought to do pretty well in his prognosis, always keeping in mind, of course, that human fallibility and the utterly unforeseen will keep him from scoring 100 per cent of bull's eyes.

 

And then, as he gains in experience, he. learns not only to do the right thing but to do it instantly, so that many people will think he does it instinctively. It really isn't automatism. It is that he has diagnosed the case according to his observations of such cases during a period of many years; and, naturally, after he has diagnosed it, he can only treat it in the way that experience has taught him is the proper treatment. You can transmit knowledge -- that is, your particular collection of card indexed facts, but not your experience. A man may know what to do and lose money -- if he doesn't do it quickly enough.

 

Experience has taught me that the way a market behaves is an excellent guide for an operator to follow.

 

Observation gives you the best tips of all.

 

When the men who ought to want a stock don't want it, why should I want it?

 

I am a trader and therefore looked for one sign: Inside buying. There wasn't any.

 

It was the difference in behaviour.

 

My years of experience in trading told me that the line of least resistance had changed from up to down.

 

It was not difficult to be both fearless and patient. A speculator must have faith in himself and in his judgment.

 

It is the character of the advance or of the decline that determines for me the correctness or the fallacy of my market position.

 

Knowledge is power and power need not fear lies -- not even when the tape prints them. The retraction follows pretty quickly.

 

"The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past."

 

I can generally tell the moment the character of the buying in the stock makes it imprudent for me to be short of it.

 

In the stock market, as in warfare, it is well to keep in mind the difference between strategy and tactics.

 

He had in superlative degree the qualities of mind that are associated with successful speculators anywhere. That he did not argue with the tape is plain. He was utterly fearless but never reckless. He could and did turn in a twinkling, if he found he was wrong. (??? Nearly 100 years before Mark Douglas)

 

Manipulation is the art of advertising through the medium of the tape. The tape should tell the story the manipulator wishes its readers to see. The truer the story the more convincing it is bound to be, and the more convincing it is the better the advertising is. A manipulator today, for instance, has not only to make a stock look strong but also to make it be strong.

 

I neither have nor adhere to an inflexible system. I modify my terms and conditions according to circumstances.

 

Well, when the price line of least resistance is established I follow it, not because I am manipulating that particular stock at that particular moment but because I am a stock operator at all times.

 

I wasn't looking for the good or the bad points, but for the facts, such, as they were.

 

Realise the wisdom of playing the game dispassionately. Well, you would be surprised at the frequency with which some of our most successful promoters behave like peevish women because the market does not act the way they wish it to act. They seem to take it as a personaln slight, and they proceed to lose money by first losing their temper.

 

And is not governed in his actions by conditions but by fears,

[idaxtrader 10]

General wisdom is less valuable than specific savvy.

 

Without any effort on their part they would have been in the strong strategic position that I always try to find myself in when I am manipulating a stock.

 

The absence of inside support is generally accepted as a pretty good bear tip.

 

All I considered was what should, could or might help or hinder me in that task.

 

Nothing but a gambler, but he had real ability and a strongly developed aptitude for the speculative game. At the same time his reputed indifference to highbrow pursuits made him the hero of numberless anecdotes.

 

I suppose that helped, for nothing succeeds like success.

 

But on general principles it is just as well to provide for any and all contingencies. It's plain sense.

 

If the most successful manipulation consists of that in which the desired end is gained at the least possible cost to the manipulator.

 

Getting angry doesn't get a man anywhere. More than once it has been borne in on me that a speculator who loses his temper is a goner. In this case there was no aftermath to the grouches.

 

Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope.

 

The old-fashioned bucket shops are gone, though bucketeering "brokerage" houses still prosper at the expense of men and women who persist in playing the game of getting rich quick.

 

The speculator's deadly enemies are: Ignorance, greed, fear and hope.

 

In addition to trying to determine how to make money one must also try to keep from losing money. It is almost as important to know what not to do as to know what should be done.

 

The public always wants to be told.

 

The experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions. No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe.

 

There is no asphalt boulevard to success in Wall Street or anywhere else. Why additionally block traffic?

[idaxtrader 10]

I thought I would post my notes from one of my favorite books. Enhancing Trader Performance by Brett Steenbarger. This is a great book I highly recommend that people read it in its entirety. Its very concrete unlike some other good books such as Trading in the Zone.

 

 

 

Perhaps my greatest shock has been the recognition that a significant proportion of emotional problems affecting traders result from departures from the principles of sound training. XIII

 

When they do not employ systematic training to translate talents into skills, and when they violate prudent risk management in eager hopes of rapid profits, they create needless frustrations and even traumas. XIII

 

 

He was cut from his team in his sophomore year of high school. Any hopes of obtaining a college scholarship were quickly receding. Most aspiring athletes would take their lumps, join a local league or intramural squad, and move on with their lives. Michael Jordan, however, was not like most young athletes. 1

 

He responded to the cut by practicing day after day. When he felt too tired to continue, he forced himself to recall his cut from the team and drove himself harder. 1

 

One of those factors is finding a performance niche: a specific activity that is most likely to capitalize on your talents and interests. 2

 

Al kept himself emotionally balanced, taking liberal time away from the screen after setbacks. He honored his stops religiously and didn’t become irate at losses. He consistently expressed optimism over his development and a love of trading. 3

 

Mick was anything but balanced, taking losses almost as personal affronts. He periodically violated his risk management guidelines and could not break from the markets until he had rehashed all his mistakes and fumed over each. 3

 

Most of the trading psychology books you’d read would give the trading edge to Al, the more disciplined, less emotional performer. But Al, the novice, never did succeed at trading. Mick was—and remains—a multimillion-

dollar performer. The experience of working with many Micks and Als—and seeing common wisdom about trading success shot down time and again—convinced me to write this book. 3

 

No doubt, there’s a bit of the young Michael Jordan in Mick. He doesn’t accept defeat lightly, and he uses losses to drive himself forward. That is characteristic of elite performers, we shall learn, but there’s something even more basic that distinguished Mick from Al. In fact, it’s so basic that K. Anders Ericsson, perhaps the most prolific researcher in the field of performance, considers it the cornerstone of expertise. Think of the difference between Al and Mick as something that occurs every day, for approximately 250 trading days a year. Both Al and Mick trade frequently enough that they have winning and losing trades each day. Al puts his losses behind him and clears his head, to focus on the upcoming trade. Mick fusses and fumes, but uses the losses to review his trading, figure out the market (and his mistakes), and get his money back. Over the course of a year, Mick’s reviews ensure that he has easily experienced twice as much market action as Al. Moreover, Mick has systematically reviewed his performance and made constant adjustments. Al, though more relaxed, has little basis for detecting and correcting his errors. Mick, for all his emotionality, has become a learning machine, using losses to improve his trading. Ericsson refers to this as deliberative practice, and it is a hallmark of expert performers. Through guided practice, experts open themselves to feedback and, as a result, become better decision makers. We often hear the phrase “practice makes perfect,” but performance experts in sports emphasize that it is perfect practice that makes perfect. 4

 

Competence precedes confidence: Winning mind-sets result from mastery, not the reverse. 4

 

Practice is the cornerstone of expertise because it multiplies experience. It provides us with far more experience than we could ever gain during formal performance or competition. 5

 

The essence of deliberative practice is what I call the learning loop. A learning loop is an attempted performance, followed by specific feedback about the success/failure of the performance, followed by renewed efforts that incorporate the feedback. 6

 

Take conscious steps to stand outside themselves and watch their performances, correct mistakes, and jump-start a learning process. 7

 

An inner urge to reach ever higher levels of performance. 8

 

Next to the leave-everything-on-the-mat work ethic of a Dan Gable, the effort of maintaining a trading journal hardly requires a laboring instinct. Yet the majority of traders won’t sustain even this level of performance commitment. Why is that? 8

 

There it was. This was not a trader who was drawn to markets the way Gable fiercely embraced wrestling or Jordan pursued basketball. He wanted to trade because he didn’t like the alternatives. The alternatives meant eight hours a day of effort and the loss of the freedom to do what he wanted to do. But elite performers are doing what they want to do when they labor far more than eight hours a day on their craft. 8

 

A middle phase. At this point of development, the performer concentrates on one or more specific fields of performance for serious pursuit. 10

 

A late phase. For a limited number of individuals, mastery of the performance activity becomes a primary life focus. The goal is no longer competence, but the development of one’s talents and skills to the fullest. There is a commitment to self-development. 10

 

The aim of such practice is the internalization of complex skills, so that high levels of performance become routine. 10

 

Without a middle period of competence development, there is no readiness for the rigors of mastery. Absent the joys of an initial, exploratory phase, there will be no sustained commitment to skill development. 11

 

How much time does it take to develop expertise? Research tells us that a minimum of 10 years is required. Indeed, this “10-year rule” is one of the more durable findings in expertise research spanning sports, the arts and sciences, chess, and medicine. There is so much knowledge and skill required by most fields that elite performance necessitates years of development. 12

 

The greats do not become great by working hard; they work hard because they find a great niche: a field that captures their talents, interests, and imagination. 13

 

He watches what large traders are doing by monitoring volume on a trade-by-trade basis and tries to decide when they have strong or weak hands. He religiously avoids thinking about the market lest he become locked into opinions

the next day. 15

 

Finding the right niche makes all the difference in the world when it comes to performance. 17

 

Each group finds its own path through the developmental process, cultivating what comes naturally and most enjoyably to them. 18

 

It’s not whether you can be a good trader; it’s whether you can find the trading that’s good for you. 19

 

We started by distinguishing experts from novices and found that experts are engaged in learning loops fueled by deliberative practice. 19

 

Key to Collins’s findings is the notion of the Hedgehog Concept: the idea that great companies simplify by focusing on their strengths. The three elements of the Hedgehog Concept are:

1. What you can be best at

2. Where you can be most profitable

3.What you are most passionate about 23

 

Good companies that never reached greatness, Collins found, strayed outside the circles defined by each of these elements. The great companies focused all their efforts at the intersection of those three circles. 23

 

What are your talents? Where is there opportunity in the markets? What turns you on? There you will find your learning efforts turbocharged by multiplier effects, yielding not just competence, but expertise. 24

 

An initial step in finding your distinctive place in the trading universe is self-assessment. 25

 

 

When you have found your niche, you don’t need discipline to do the right things; you won’t want to do anything else. 29

 

People develop their potential by building on their strengths, not by trying to overcome their weaknesses. Successful performers, they argue, work around their shortcomings, but achieve great things by making maximum use of their strengths. 40

 

Your ideal trading niche will be one that allows you to exercise your greatest talents while working around your weaknesses. 40

 

You will know that you are close to your market niche when you develop a feel for market patterns quickly, find yourself fascinated by the patterns you see, and act readily upon your perceptions 42

 

Other traders who are less emotional, more disciplined, and more systematic may fail because they lack strengths that readily translate into trading edges. 43

 

Only such a bond creates the immersion that leads one to internalize a field, not just learn about it. 53

 

Stated differently, ordinary learning generates ordinary performance. Immersive learning—sparked by the crystallizing experience—is the motive force behind Collins’s flywheel, generating multiplier effects that build expertise. 55

 

Creativity—the novel seeing and doing born of unique, immersive experience—be the ultimate source of edge in the markets? Is it creativity that distinguishes great traders from those who are merely good? 55

 

Equally important, he shifted his perception. What had been a threat was now a source of opportunity. Chad now began to scan the market for places where sharp moves left overexposed traders vulnerable. 57

 

Indeed, he became so adept at recognizing when others were trapped (as he had been) that other traders would immediately seek him out following sharp market moves to get his read on the market. 58

 

This new perception—his crystallizing experience—reorganized his views of the market. What was danger became opportunity; what was frustrating now was exciting; what was incomprehensible made sense. The competence

he developed was not just that of self-control. He developed new ways of seeing and doing. His was an exercise in creativity, not therapy. 58

 

“Only those who have the patience to do simple things perfectly,” the saying goes, “will acquire the skill to do difficult things easily.” 60

 

His rage to master the game was so strong that it obliterated the normal distinction between work and play. 62

 

At some point in the development process, performers begin to integrate their activities into their identities. 62

 

The kiss of death for expertise is comfort. 64

 

The performer becomes so absorbed in the performance that it seems to flow effortlessly. 65

 

Our ability to sustain the immersion that generates multiplier effects depends upon the experience of competence. Without the perception of mastery, there can be no learning that generates expertise. 70

 

To a large degree, our moods are moderated by our perceptions—and especially our perceptions regarding our own competence. 70

 

We cannot be divided and also immersed in the flow experience that generates expertise. 71

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At this optimal state of arousal, the performer is divided by neither the understimulation of boredom nor the overstimulation of anxiety. Nor is there a divide between real and ideal that cannot be bridged. Flow occurs when there is a perception of likelihood of success at an important task, but not certainty. 71

 

Boredom, anxiety, and depression interfere with learning because they are distractions: They divide attention. Positive thoughts born of overconfidence are equal distractions. Interestingly, we need to feel competent to develop competence: The perception of competence generates the flow that enhances concentration and learning.

 

He was like the ordinary student, trying to build competence through normal efforts and practice. He could not immerse himself in markets to achieve the competence that leads to expertise. 72

 

Divided attention is the source of most performance shortcomings. 72

 

 

First-order competence is optimism about doing; second-order competence is optimism about competence building itself. A first-order performer feels competent to navigate through New York City but not London. A second-order performer feels competent to quickly learn the layout of any city. 72

 

Once they realized they could bridge the gap between real and ideal, they could face their shortcomings without fear or distraction. 73

 

Those who bounce from strategy to strategy are apt to pursue each one until it produces failure, leaving behind a string of disappointments. The resilient performer has cultivated enough second-order competence to stay in the zone even when the inevitable strings of setbacks occur. 75

 

Armstrong reveals an important secret about his ability to overcome this late-stage and often-fatal cancer. He explains that cancer gave him “a new sense of purpose” (page 151), replacing biking as his reason for being. He would start a cancer foundation and help others fight the disease. His role was no longer cyclist; he now defined himself as a survivor who would help other survivors. 75

 

His new goal—and his redefinition of who he was—no doubt contributed to that recovery. 75

 

This pervading sense that one is competent to master changing conditions allows performers to develop resilience to setbacks that would overwhelm their peers. Very often, as with Armstrong, this resilience is fueled by the performer’s creation of a new identity—one that redefines the challenge ahead. 76

 

The rage to master is fueled by the sense of self-mastery, and that is generated by experiencing and overcoming changing conditions. 76

 

 

If cancer and concentration camps cannot keep the human spirit from mastery, no challenges in markets, careers, or relationships are too

great to overcome—as long as you have the why. 79

 

There is no performance without purpose. 79

 

What does it mean to structure learning for success? Csikszentmihalyi outlines several preconditions of the flow experience in his book Creativity: Clear goals at each step of the learning process. Immediate feedback regarding one’s actions. A balance between challenges and skills. 80

 

He could not have experienced himself as competent. The coordination exercises, visualizations, and practice sessions for his swing, however, allowed him to master basic skills and develop a sense of confidence and ability. Cordoba’s feedback was essential to this process. He helped his student feel like a winner, and his student responded.

 

Cordoba’s genius in working with Sharon was his breaking down of complex tasks into component skills that could be rehearsed with clear goals and feedback. This is close to a universal principle in performance development: Wherever we encounter expertise, we see the intensive rehearsal of component skills. Not only does this drilling build performance to the point where it becomes automatic, it also cultivates the sense of mastery by creating positive mirrors. 83

 

Dan Gable explains how he consistently elicited excellencefrom his teams. He broke each skill into several segments and then demonstrated each with a clear explanation. 83

 

For now, the important thing to realize is that you can break trading down into bite-size pieces, rehearse those, develop mastery, and keep yourself in the flow state. Drilling is fun once we get it, and we are most likely to stick with something that feels good. The perfect practice that makes perfect develops performance-specific skills but also cultivates the conditions for sustained concentration, enhanced learning, and increased confidence. 84

 

Set goals for each practice session to generate immediate feedback. Each practice session’s objectives would be based upon progress from previous sessions. Goals would be specific, to track gains in learning. 87

 

Drill skills to promote implicit learning. We would make skills automatic through rapid repetition, solidifying learning, and providing resistance to emotional interference. 87

 

Competence requires curriculum: a systematic approach to learning. 87

 

As skills are brought to increasingly realistic performance settings, coaches generally advocate working thoroughly on one cluster of skills before starting others. Chris Carmichael and Lance Armstrong, detailing performance programs for cyclists, use the analogy of painting a house. Painting a wall of one room, then going to the ceiling of another, and then to a hallway would be inefficient. It makes more sense to complete one room at a time. 88

 

Carmichael and Armstrong describe four-week blocks of practice for each skill module before working on subsequent modules. Thus, for example, a cyclist may spend four weeks working on sprinting, the next four on climbing. 88

 

 

Divide overall performance into a set of skill modules that include the processes of monitoring markets for favorable trading conditions, researching/identifying trade ideas, working orders/entering positions, managing trades, and working orders/exiting positions. Assign time periods to each module to create a curriculum, with the most basic skills preceding more specialized ones. Within each period, break each module into component skills and mix the drilling of these skills to create realistic enactments. Establish explicit, challenging, but attainable training goals for each practice session and period and collect feedback about performance to track progress toward goals. Utilize feedback to set goals for the next practice sessions. Utilize feedback to make changes in the pacing of the curriculum, extending periods if progress is slower and moving ahead if progress is rapid. 89

 

Amateurs learn by performing, creating repeated experience without structure or feedback. Professionals learn by drilling, progressing through structured sequences of skills with the assistance of feedback and mentoring. 90

 

Despite this seemingly obvious truth, we see few traders attempt to learnthrough training. Instead, they approach trading in the amateur mode, only to lose money and court frustration. 90

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McNab describes a variety of training strategies that thoroughly and competently train ordinary soldiers and bring them to the elite levels of Special Forces troops. The key to such strategies, he emphasizes, is realism. For example, soldiers must be exposed to the sights and sounds of the battlefield or they will become disoriented under actual wartime conditions.Without prior exposure to the intense fighting conditions that they encountered, they froze under pressure. This is highly relevant to trading, where the real-time conditions of risk and reward create their own battlefields. 92

 

Traders progress from simulating skill modules—entries, risk management, and so on—to placing and managing trades, then trading full days in simulation mode, and eventually putting money on the line with one-lots. Facing—and mastering—challenges time after time creates the battle inoculation that allows traders to keep their cool under the most

pressured circumstances. 92

 

It is the role of the mentor to ensure that the increasing demands of training build the confidence of performers, rather than defeat them. 92

 

Your greatest challenge will be to create learning conditions that test you but do not break your spirit. 92

 

As your own mentor, you provide that competent and confident leadership by creating a steady stream of challenging goals that build upon one another. After struggling with one goal after another and succeeding, you will face the markets with a reservoir of confidence unknown by most market participants. Like the soldiers, you will be battleproofed—the hallmark of true competence. 93

 

Let’s step back and summarize. When we look at the training of athletes, professional musicians, therapists, physicians, soldiers, and chess players, we see the same three-step progression:

1. Breaking performance into component skills

2. Assembling modules of skills into simple simulations of performance

3. Requiring skill enactment in simulations of gradually increasing complexity

 

 

This is why every single elite training program I have been able to find—in sports, chess, health care, and the military—emphasizes progressive skill building through a structured program of practice. 100

 

Your exercise is to find your frame and just one way of trading it. Keep it simple. Become good at one kind of trade. That will provide you with a foundation for further development. 107

 

 

Guided activity in the form of training and mentorship challenges the performer and builds the sense of competence,

sustaining a flow state of high motivation, concentration, and learning. In this state, growth proceeds rapidly. 111

 

Expertise is skill internalized to the point of habit.116

 

 

Ericsson’s research suggests that the concentration of the performer is an essential element in deliberative practice—another factor that distinguishes it from playful experience with a performance field. This means that the duration of effective practice sessions must be limited to allow for rest and recuperation of attention and focus. Naps and rest periods are common among elite performers, reflecting the intensity of activity during practice. In addition to recuperative breaks, the presence of concrete goals and immediate feedback help to keep performers focused on learning during practice sessions. 118

 

Eventually you could do those things in your sleep. In fact, given the frequent occurrence of hallucinations among sleep-deprived recruits, there’s a sense in which they are doing it in their sleep—which is the whole point. Through repetition, even extreme challenges become automatic. 119

 

The elite in any field move from competence to expertise by creating performance challenges more demanding than anything they’re likely to experience day to day. We evolve by creating and adapting to challenges that lie outside our comfort zone. 120

 

These traders have seen so many markets and market scenarios that they develop an anticipatory sense—a

conviction that something is likely to happen because it has happened so many times before. 120

 

His formula for hitting success was simple: “Get a good pitch to hit.” 122

 

In a very important sense, when traders develop expertise, the markets they see are different from the markets

everyone else sees. 125

 

Expert traders similarly chunk information into meaningful groups, aiding their recall and speeding their responses to market events. 126

 

Rather, experts have accumulated so much implicit learning that they process events more efficiently and effectively than their counterparts. Their training has provided them with new ways of seeing the world based upon the grouping of their perceptions. 126

 

Novice traders reason in the backward fashion: They look for information to support their opinions rather than assemble their trade ideas from their readings of the market. Expert traders often talk about “letting the market come to me”—another way of saying that the right trades, like the right diagnoses, will emerge from gathering the right data. This is only possible, however, when traders, like physicians, have internalized a kind of decision tree that guides the circular process of collecting information and formulating tentative ideas. 128

 

Decisive action begins with efficient perception and organized information. 128

 

Cleeremans and colleagues found that implicit learning is actually an acquisition of knowledge about the statistical structure of events. Williams and Starkes, writing in a completely different field, find that experts possess knowledge about situational probabilities that guide their actions. 130

 

This accounts for an interesting finding from the research: Not only do expert players make more accurate assessments of ball location, they are also more confident in their assessments than nonexperts. 130

 

He has learned that, when he sees X, he should do Y. The X-Y linkage, repeated many times across varying conditions, becomes part of his instincts. My explicit processing cannot hope to keep up with such automatic, implicit thinking. 131

 

This is not merely the will to win, as Bob Knight emphasizes, but the will to prepare to win. 133

 

Contrary to the advertisements common in the popular media, trading expertise is not a function of possessing a superior indicator, mind-set, or chart pattern. Expert traders process market information differently from nonexperts, cultivating sophisticated mental maps that enable them to eliminate irrelevant information and implicitly process the patterns amidthe market noise. Armed with such maps, expert traders respond more rapidly, confidently, and accurately to market events than do nonexperts. 134

 

Like Tiger and Nolan, Ted Williams dominated his sport by the consistent application of proper mechanics. 137

 

Great results come from small improvements that are implemented with consistency. 138

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Specific Skills that Comprise Trading Mechanics

Trading Mechanics

• Idea development. Translating observations about the market into specific trade

ideas; gathering information the right way to produce useful conclusions.

• Assessment of market conditions. Evaluating whether the market is trending,

rangebound, volatile, or slow; ensuring that the trade idea is appropriate for the

present market.

• Order placement. Using the kinds of orders appropriate for market conditions to

maximize the likelihood of getting filled at desired prices.

• Order location. Selecting prices for orders that correspond to turning points in

supply and demand, thereby minimizing drawdowns and maximizing

opportunity.

• Order division. Scaling into positions to reduce initial risk exposure and obtain

superior average entry prices; scaling out of positions to secure profits and

benefit from favorable movement.

• Position sizing. Risking enough on a trade to make a meaningful contribution to

profitability while avoiding risk of ruin under adverse circumstances.

• Position diversification. Spreading risks among uncorrelated trades so as to

benefit from market participation but limit risk exposure; selecting trading

instruments most likely to benefit from the trade ideas.

• Exit determination. Defining clear criteria for when your trade ideas are wrong;

implementing proper stops to manage the risk exposure of each trade.

• Exit flexibility. Moving stop-loss points to protect profits while retaining

profit potential.

• Speed of execution. Making and implementing decisions rapidly.

• Accuracy of execution. Minimizing errors in order placement.

• Efficiency of information processing. Monitoring relevant variables in real time

to properly manage trades. 140

 

 

they traded well, they do not necessarily mean that they made a lot of money. They mean that they were fundamentally sound. Mechanics are rarely glamorous, but they account for a surprising degree of profitability. 141

 

 

Carl was a study in poor mechanics. Let’s play observer and review his

shortcomings:

• He had no real trade idea. “We’re not going lower” is not a firm foundation for a rational wagering of one’s trading stake. The reality was that we weren’t going anywhere, as long as the market was trading a few dozen contracts per minute on average. Without a valid trade idea, he had no edge in the marketplace.

• He gave up the edge needlessly. In a slow market, there was no urgency to getting in. If he had a valid reason to enter the market, he could have worked a bid and gained a tick simply by being patient. Instead, he took the offer after the market had already ticked higher, exposing him to those who had worked bids and now could take their scalping profits.

• He wagered impulsively. A good trending market will give multiple opportunities for entry, making it easy to scale into a trade even if you do have to go at the market as the trade picks up on a breakout. Entering with his maximum position exposed Carl to maximum risk before he had an opportunity to see if the position would move his way.

• He exited emotionally. Instead of exiting when the trade didn’t go his way, he exited when it went against him. If his trade was truly predicated on a breakout move or surge of buying, it should have gone his way promptly. Instead, he waited until it reached his pain threshold before exiting.

• He did not process information effectively. At no time during Carl’s trade was there evidence of bidders entering the order book or lifting offers in size. He failed to see bidders cancel their orders prior to the market moving against him, so he could not exit quickly. 142

 

My goal in working with traders such as Carl is to enable them to become keen observers of their own mechanics. This means emphasizing trade execution as much as overall profitability, and it means placing emphasis on the management of trades, from position sizing through exits. The majority of traders want to think about trades as things: events that are

either profitable or not profitable. The mechanics approach to performance, however, views trades as processes. 142

 

Much of profitability, I’ve found, is simply staying away from markets and market periods that do not offer a distinct edge. 151

 

To the extent, however, that you can break your information gathering down into the kinds of checkpoints described by Nolan Ryan, you turn much of the process of selecting tactics into one of mechanics. The bottom line is that, for any style of trading, there are mechanically sound and unsound ways to gather information and make decisions from the data. 151

 

One mark of a truly expert trader is the ability to rapidly adapt trading tactics to shifting market conditions. When you think about it, this is also a hallmark of expert emergency room physicians, battlefield commanders, and coaches. 151

 

Nothing so interferes with a performance as thinking about the performance while engaging in it. Most of us are familiar with the performance anxiety that affects speakers and test takers: The worries about how one is doing take one out of the flow of doing. For this reason, your observation and evaluation of your mechanics, tactics, and strategies need to occur outside of trading. While you’re trading, you’re the trader. All other times, you’re the mentor to that trader. 157

 

The structural edge, to which I have alluded earlier, is based upon knowledge of the participants in the equity

index marketplace. Many of these are day time frame participants, and many are highly leveraged. This creates situations in which traders behave as a herd, jumping aboard whatever movement they can detect in the market.

It also creates situations in which these same traders have to exitpositions quickly as part of risk management. Because of this, much of the day’s trade in the ES consists of waves of buying and selling attributable to herd behavior and the mass exiting of positions that are going underwater. Identifying spots where the herd is loaded up in one direction and will need to unload their holdings if their anticipations prove incorrect provides a structural edge. 160

 

Profits take care of themselves when you have a legitimate edge and execute properly. 161

 

Pele blended speed, vision, and accuracy as no one had previously. His formula for success? “Practice is everything.” 164

 

performance is not about speed, but rather about process. “Being fast comes with having lean processes. If you just focus on speed, you wind up with mistakes.” This is why instructors at PIT advise aspiring crew members, “Go slow to go fast.” The goal is smooth, lean operation— not hurried behavior. 165

 

Surprise is the great enemy. All training is for naught if we are taken by surprise and cannot make sense of our experience. 166

 

Markets will move—or fail to move—just beyond the level of expectations of participants. That is the only way the ambusher can take money from the ambushed. Preparing for expectable market events is important, just as preparing for routine car maintenance is the bread and butter of any pit crew. It’s the preparation for the unexpected, however, that, over time, wins the Winston Cup. 167

 

his challenge that he could win any dogfight—ride the tail of any challenger—within 40 seconds. His ability was to operate from inside the mind-set of his adversary: what he called the OODA (observation, orientation, decision, action) loop. 167

 

When you become predictable in a dogfight, you are inside the OODA loop of the other pilot. The pilot who wins is the one who stays outside the opponent’s loop. This is why the surprise, speed, and violence of action mentioned by Machowicz are so effective. A predictable attack, such as when British troops would line up in formation in their red coats, complete with flags flying and music playing, was within the OODA loop of savvy colonists. It is the swift, unexpected, violent attack of the guerilla force that can unnerve a much larger opponent. 167

 

What is well known and well publicized—from chart patterns to news stories—represents the OODA loop of the average market participant. If what you lean on for your edge is information that can be readily accessed by any trader possessing a decent real-time charting or market depth application, you are within the OODA loop of the pros, not outside it. 167

 

My particular focus would be on the triggers for this frustration: the market and trading events that precede her loss of control and deviations from sound mechanics. We would then work on specific brief therapy techniques for deprogramming these triggers and gaining cognitive and physical control over frustration 174

 

The bottom line is that we cannot improve what we do not observe. Most traders haven’t the slightest idea where they stand on these various metrics, nor are they aware of how their metrics are impacted by shifts in market conditions. We spend far more time studying markets than studying ourselves, and that is at our peril. The metrics will identify trading problems before they become financial problems. They will alert you to potential blowups before you incur devastating losses. Metrics complete learning loops, linking self-observation to self-improvement. 178

 

The key is selfobservation: constantly knowing—and wanting to know—what works and what doesn’t. Do you really know your strengths as a trader? If not, how can you build upon them and extend them? Are you aware of the weaknesses of your strategy, tactics, or mechanics? If not, can you truly improve them? We as traders are every bit as patterned as the markets we trade. Exploiting our patterns is an essential part of profiting from those in the market. 181

 

Journals contain a variety of information, but usually consist of the following:

• A trading plan. How one intends to trade.

• Goals. Things to work on in trading.

• Observations. About oneself and the market. 182

 

The evolving performer asks: What will I work on today? How will I work on it? How will I know if I’m successful? What have I learned from today that can be utilized tomorrow? The role of a diary is to structure responses to these questions and keep them in conscious awareness. This allows us to focus on achieving process goals rather than profits.

183

 

The value of the real-time diary is that it pushes us to stand outside ourselves and remove the prisms. To simply ask the questions “What is my state right now?” and “How is my state affecting my perceptions and behaviors?” requires that we stand apart from our frames of mind. The diary cultivates the self-observer in all of us, building our capacity to shift our own states intentionally. 184

 

“The difference I havefound between the good and the great traders is that great traders are always acutely aware of areas where they need to improve and they work very hard to eliminate those weak links. . . . There is no greater tool in my opinion than a good trading diary of things you’ve learned. When I read my trading diary from several years ago, I’m always amazed how many things I’ve actually forgotten.” 184

 

When you examine the field of performance coaching, whether in trading, athletics, or other fields, two interventions stand out: goal setting and visualization. 185

 

Performance goals such as these reflect mechanics: concrete actions that, performed well, contribute to results. They keep traders in a state of flow rather than compete for trader attention and concentration. 186

 

the acronym SMART to capture the common features of effective performance goals. Such goals are Specific, Measurable, Action- Oriented, Realistic, and Timely. 187

 

Common deficiencies of goals include:

• Not specific. The goals are framed in general terms, such as “I will trade with more discipline” or “I will let my winners ride,” so that they cannot guide specific actions and facilitate the development of positive habit patterns.

• Not measurable. The goal is framed as a state of mind—“I will trade with greater confidence”—or as an outcome that cannot be tracked with metrics, as in “I will trade well,” preventing any assessment of progress.

• Not action-oriented. Goals are stated as end points rather than as activities to perform, such as “I will make money today.”

• Not realistic. Goals are pie-in-the-sky, as in “I want to be green every day this month,” or are so numerous that they cannot be addressed effectively at one time.

• Not timely. Goals are so far into the future that they cannot guide current performance, as in “I want this to be my best year trading.” 187

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A goal that is not tied to immediate plans and feedback leaves a trader with no clearly perceived path toward goal attainment. Burton and colleagues make the excellent point that performers with lower levels of confidence and efficacy will especially benefit from goals that create experiences of success and control. 189

 

Because imagery is functionally equivalent to actual experience, performers can benefit from skill building via imagery as a supplement to deliberative practice. 190

 

1. Mental practice improves performance.

2. Mental practice added to physical practice improves performance

3. Mental practice improves cognitive skills more than motor ones.

4. Mental practice benefits expert performers more than novices.

5. The benefits of mental practice decrease quickly with time.

 

 

An additional, interesting finding is that imagery-based practice is most effective when it is vivid and when it is positive. People differ in their abilities to produce vivid imagery, and it appears that highly vivid images best serve as rehearsals for live performance. 190

 

Employed properly, imagery enhances goal setting by making goals real. 190

 

It is not enough to read books and articles, attend workshops, and review charts. Performance development is planful, systematic work on oneself. 191

 

An objective observer of the human race would conclude that people lack self-control. 193

 

Why would a trader who has written one rule after another in a journal lurch into a large position—and then hold it

as it goes against him? It almost seems like self-sabotage, but in fact it is much worse than that.It is the result of an absence of a unified self. 193

 

Quite simply, the “me” in us—our sense of who we are—is stronger than our “I”—our ability to intentionally guide our actions. 194

 

you cannot achieve unity of self unless you work on it while you are fragmented. This is the essence of realtime self-therapy. 194

 

What I’m doing is—metaphorically—shaking traders by the shoulders, holding up a mirror, and saying, “Look at yourself! You’re worked up! Do you really want to be putting on trades now?” The goal is to help people stand outside themselves as observers, even as they are experiencing moment-to-moment state shifts. That observing capacity is the

glue holding the self together, allowing us to act with intention. “You’re frustrated; don’t go there” is the message from the therapist in us to our trader self. 195

 

The first step of progress in cognitive work is seeing that we have more control over our reactions than we thought we had: It’s our way of looking at things—and not things themselves—that maintain our problem patterns. 201

 

Cognitive therapy is most powerful when it provides us with direct experiences that undermine our most negative beliefs. 202

 

My own experience is that cognitive work is especially effective in situations like James’s, in which loss of confidence,

worry, and negative thinking are major elements. By framing these as part of our self-talk—our conversations with ourselves—traders can make rapid progress in distancing themselves from old patterns and beginning new ones. The value of this is that, without the negative self-talk, traders no longer experience the high levels of distress that trigger old coping patterns and generate further problems. 203

 

Research tells us that involvement in the therapy—practicing techniques on a daily basis, engaging in them emotionally, and applying them to actual life situations—accelerates change and improves the likelihood of success. 204

 

The goal of cognitive therapy is to help you become expert at thinking about your thinking: to become aware of your automatic thought patterns so that you can critically evaluate and change them. In a sense, cognitive therapy is an unlearning process. 204

 

The idea of the cognitive journal is to interrupt ourselves when we’re experiencing one of our characteristic problems—negative thinking or impulsive behavior—and identify the thoughts and beliefs that are associated with these problems. The journal forces us to become observers of ourselves rather than getting wrapped up in the problems of the moment. 204

 

Albert Ellis suggested a useful format for journals that he described as

an A-B-C sequence:

• Activating event. The situation that is occurring at the time we are experiencing our problem pattern.

• Beliefs. The thoughts and perceptions that are triggered by the event.

• Consequences. What we are feeling and how we are behaving as a result of the triggered beliefs.

 

Time and again I have seen people make remarkable changes, including ending long-term addictions, when they start viewing their problem patterns as personal enemies. The cognitive journal keeps the trader focused on the message “I am not a loser; it’s my negative way of thinking that’s making me feel like a loser.” By reinforcing this message

again and again, the journal helps traders sustain the momentum of their change efforts. 205

 

First, the journaling should be conducted every day until traders can clearly identify the one or two core beliefs or distortions that are most interfering with their performance. It is important for traders to recognize their own patterns and appreciate the degree to which their thinking is patterned. Second, the journal is just a learning tool. The ultimate goal is to recognize our cognitive patterns as they are occurring.Once traders can catch themselves in the act of distorting events and falling into old, automatic thoughts, it is time to move to the next phase of cognitive work. In general, I have found that at least two weeks of daily work with the journal are necessary before patterns become clear and people are able to catch those patterns in real time. 205

 

When people catch themselves falling into an automatic thought pattern, they purposely interrupt the negative thinking process by saying (out loud or to themselves): Stop! The purpose of this technique is to become more mindful: to not only recognize negative thoughts as they occur, but to actively interrupt them and decide to not run with them. 206

 

The idea of the fourth column is to question the negative assumptions and beliefs, rather than automatically identify with them. By playing devil’s advocate with your automatic thoughts, you reinforce the mindful part of you that does not want to fall into the old traps. The interesting part is that, as you repeat this devil’s advocacy day after day through the journal, the disputation process itself starts to become automatic: You are much more likely to catch negative thought patterns as they occur and reject them. 206

 

By translating self-talk into a conversation and vividly imaging the talk coming from another person, we become an observer of the distorted thoughts—much more able to view them critically and reject them. 208

 

Speaking our thoughts aloud gives them objectivity, allowing us to adopt the role of listener as well as speaker. It is not at all unusual for traders to reject their negative thoughts before they’ve even finished verbalizing them—that’s how silly they sound when they are given voice. 208

 

The common element in all of these approaches is that you are telling yourself, “The situation is not what’s making me feel this way; it’s how I’m processing the situation.” Once you realize this, it gives you room to stand apart from your processing and try to look at things from different perspectives. 210

 

The most important step to winning is learning that losses are part of the game. Every successful person has failed many times before succeeding.” Cognitive techniques reframe our perceptions of winning and losing, focusing us on learning and improving. 210

 

Should you find that you are not benefiting from the cognitive work, one of several factors may be the problem:

 

 

• Lack of focus. Sometimes people try to change too much all at once and bog down. It is usually not effective to work on multiple patterns at once. More promising is prioritizing patterns and tackling one at a time.

 

• Lack of repetition. Many times, you will be trying to unlearn patterns that have been present—and reinforced—over a period of years. This does not occur overnight. A daily focus over a sustained period provides an opportunity to internalize learning.

 

• Lack of emotional intensity. This is perhaps the most common mistake people make in cognitive therapy. Keeping a journal can become a routine, unemotional affair that never challenges old thinking patterns with passion and immediacy. Active methods such as talking about patterns aloud and utilizing imagery can yield greater emotional involvement.

 

• Incorrect diagnosis. Perhaps the problem is not what you think. Ifyour negative thinking is grounded in a biologically based depression, cognitive work might help, but it should be guided by a professional. It may also need to be supplemented with pharmacotherapy. Alternatively, emotional patterns of frustration may result from trading problems,

such as changing markets that have greatly reduced the edge of a particular strategy.

 

 

Behavior therapy works by reversing this process. It consists of a variety of techniques that allow us to process undigested events consciously, in essence reprogramming memory. It unconditions certain responses and helps us condition others. 217

 

What we typically call behavior therapy is really a collection of techniques for unlearning harmful conditioned responses and instilling new, positive ones. In becoming your own behavior therapist, it will be necessary for you to learn and implement the more basic techniques before progressing to more advanced ones. 222

 

Let’s start with the very most basic behavioral intervention: relaxation training. This is a method that is quite effective in dampening anxiety and frustration. The first step in relaxation training is learning how to breathe diaphragmatically. Deep, slow, controlled breathing is one of the simplest but also most effective ways of checking your physical and cognitive arousal. To breathe diaphragmatically, you begin by seating yourself in a comfortable position and closing your eyes to remove distractions. You then take deep, slow breaths from your abdomen. In the beginning, it is helpful to place your hand on your stomach as you breathe, making sure that your belly expands as you inhale and contracts as you exhale. Breaths should be deep, smooth, and slow; you want to avoid hyperventilating. As you breathe in, count your number of breaths aloud. As you breathe out, say the word “Relax.” As much as possible, just focus your mind on the counting of breaths and the word “Relax.” In the beginning, you may be distracted and find the breathing from the abdomen difficult. With practice, it becomes quite easy and natural. After 10 to 15 minutes, one can typically achieve a highly relaxed state. 223

 

Note that this, in itself, is not a treatment for trauma; it does not prevent cues from being triggered in the first place, nor does it reprogram those cues. It does, however, allow us to undo the effects of conditioning quite quickly, providing

rapid relief. This is very helpful to traders who find themselves getting worked up while a position is on 223

 

The second step in your behavior therapy is to conduct a cataloging. We want to find out everything that is happening leading up to a disruption of trading. This means cataloging emotional reactions, events surrounding these reactions, and all thoughts and sensations occurring at those times. The more complete your catalog is, the more likely it will be

that you will discover your specific triggers. 224

 

A Catalog of Cues for Trading Disruptions Common Triggers

 

• Euphoria. Highly excited, positive feelings trigger overconfidence and overtrading.

• Anxiety. Intense fear triggers impulsive actions to relieve the state.

• Boredom. Lack of activity and feelings of emptiness trigger stimulation seeking activity to relieve the state.

• Sudden market movements. These become associated with particular emotional states and trigger fear, greed, overconfidence, or frustration.

• Large and/or sudden losses. These trigger feelings of loss/depression, frustration/anger, or fear, which, in turn, trigger coping responses to dampen these.

• Strings of wins or losses. These also trigger overconfidence and frustration and result in overtrading and distorted trade management

 

The idea is that you use the power of imagery to create a mild form of the traumatic trigger, keep yourself under control with the abdominal breathing, and then rehearse the coping behaviors you would like to utilize in the situation. Ideally, this is repeated with a variety of imagined scenarios, each reinforcing desired coping responses. For instance, if you wanted to ensure that you honor your stop-loss points during adverse market movement, you could vividly imagine markets moving against you while you sustain your slow, deep breathing. You would then envision yourself exiting

your position at your chosen point, even as you focus on the adverse market movement 225

 

This basic exercise accomplishes the two ends of behavior therapy. First, it allows you to face a threatening situation while you are rehearsing self-control. With repetition, you loosen the associative link between the trigger event (adverse market movement) and your conditioned response. A major reason for this is that you are requiring yourself to process the trigger event consciously, with full awareness.

 

As you might imagine, repetition is crucial to the success of such reprocessing. Vivid imagery, emotional involvement in the scenario, and frequent repetition increase the likelihood of altering existing conditioned responses and creating new ones. 226

 

 

A cornerstone of systematic desensitization is that you do not move to higher levels of the hierarchy until you have completely eliminated distress at the lower levels.

 

some traders I’ve worked with have used noise-canceling headphones while closing their eyes and focusing on a repeated phrase to fix their attention— and heightened focus facilitates enhanced conscious processing. The key to the success of this method is sticking with it long enough to adapt to the altered sensory conditions. If you find yourself bored with the exercise, you haven’t stuck with it long enough for the adaptation to take hold. Over time, given sufficient practice, the enhanced state can be reached rapidly—usually within seconds 229

[idaxtrader 10]

Thus, for instance, if you conditioned your state of focusand concentration to repetitive music, you would play the music while you are trading. If your entry into the flow state was associated with sitting very still and reducing sensory exposure, you would remain perfectly motionless as you follow the market, wearing noise-canceling headphones. Because of the repetition of your efforts to enter the Yoda state, you have learned to associate particular cues with that state. Evoking those cues allows you to summon the state in real time and access the coping associated with focused concentration, just as traumatic cues elicit distress and result in regressive coping. This is an example of creating a “positive trauma”: a powerful experience that evokes a desired set of responses. 231

 

To repeat: It is important to master the entry into the focused mode prior to conducting the actual exposure in trading. I am convinced that several highly extended sessions to enter and sustain the focused mode are much more effective in helping you master the Yoda state than a greater number of brief sessions. 232

 

 

When I first trained myself, it was with 31⁄2-hour sessions conducted to Glass’s Music in Twelve Parts in the dead of night, with no distractions. It was the smartest thing I could have done. Over the course of more than 200 minutes straight, you encounter one internal distraction after another and learn what you need to do to tune it out and sustain your focus. That same tuning out and focusing is what you bring to the graded exposure of trading. 232

 

Our source of deepest confidence is the overcoming of worthy challenges and obstacles. 239

 

He returned to the S&P market when it reopened and, in Scott’s words, “One day it clicked.” He began to make money, and his confidence grew. Indeed, his confidence had grown so much by January that he bet firm owner Chuck that he would finish the year as Kingstree’s number one trader. He eventually won that bet. 241

 

The majority of emotional disruptions of trading are preventable. They stem from three sources: (1) inadequate training and resulting frustration, (2) mismatches between trader strengths and the demands of their trading niches, and (3) deficiencies in risk management leading to overtrading. 250

 

Properly structured training will generate sustained experiences of learning, mastery, and confidence. They will contribute to a sense of efficacy. These positive emotional experiences are precisely what you need to be able to handle the inevitable stresses of risk and reward as you increase your size. Properly configured training will also serve as training to enter and sustain the flow state in which we activate our brain’s executive functions and will make our

best decisions. If your learning experience is understructured, you will be at greater risk of emotional frustrations and conditioning effects that disrupt coping. 252

 

Military officers refer to the “fog of war”: the uncertainties surrounding all decisions and actions. A great deal of military training is designed to help soldiers perform high-level tasks automatically even amid the fog. Trading, too, is conducted in fog. 255

[idaxtrader 10]

I thought I would re-read the work of Tony Crabel and post my notes here. In the past his ideas worked well. It stopped working so well on the index futures in the environment of low volatility. Now that we have entered a new era in the market where volatility will most likely remain high due to the permanent changes the credit market turmoil caused on the thought processes of the big institutions.

 

 

 

 

 

As a trader, my purpose is to develop a framework for understanding the market.

 

The three concepts, ORB, price patterns, and contraction/expansion, provide the basic framework for viewing the market. However, their power as tools for trading can be multiplied by integrating them into one system. The combination of these three can capture the essential action of the marketplace.

 

 

An Opening Range Breakout (hereafter called ORB) is a trade taken at a predetermined amount above or below the opening range. When the predetermined amount (the stretch) is computed, a buy stop is placed that amount above the high of

the opening range and a sell stop is placed the same amount below the low of the opening range.

 

The Stretch is determined by looking at the previous ten days and averaging the sum 6f the differences between the open for each day and the closest extreme to the open on each day.

 

The ORB is effective after inside days that have a smaller daily range than the previous four or five days and for that matter after any day that has a daily range less than the previous six days (NR7) whether an inside day or not.

 

 

Hook days also tend to precede big moves in one direction. A

Hook day is any day that opens above or below the previous day's high or low then proceeds to reverse the previous day's close but does so with a narrowing daily range relative to the previous day.

 

Notice the proximity of the next day's open to one of the extremes for that day and the general tendency of the close of the same day to be at the opposite extreme

 

Inside days act as springboards for an immediate continuation in the direction of the run.

 

 

In general the earlier in the session the entry is taken the better the chances for success. In fact , the ideal is an entry within the first ten minutes of the session.

[idaxtrader 10]

When judging the market action after entry compare it to the ideal, early entry with immediate profit and persistent follow through thereafter. Action that varies from the ideal is suspect.

 

The ORB can be utilized as a general indicator of bias everyday.

 

Whichever side of the stretch is traded first will indicate bias in that direction for the next two to three hours of the session.

 

If nothing else this information alone will keep you out of trouble.

 

Multiple contracts can be used when entering on an ORB or ORBP. This allows for some profit-taking as the move continues guaranteeing at least some profit in the case of a pullback to break-even stop.

 

In summary, the open is a market primary. Without an understanding of its importance and the market action around it, its difficult to come to correct conclusions about market direction.

 

On any day that such a breakout occurs within the first ten minutes of trade, the information is overwhelmingly in favor of a continuation of that move.

 

 

Early Entry (EE) is defined as a large price movement in one direction within the first five minutes after the open of the daily session. This is ideal price action when using an ORB for entry. The open should act as one extreme.

 

 

The characteristics of a Type 1 EE are as follows. The first five minute unit has a larger range than normal (norm is roughly defined as the average of the preceding ten days (first five-minute ranges). Open of the day is on one extreme of the five minute bar and the close of the five minute bar is on the opposite extreme. The second five minutes shows an equal thrust in the direction of the first five minute period.

 

 

A Type 2 EE is extremely powerful and is characterized by an excessively large range in the first five minutes, quite possibly bigger than the previous twenty day's first five minute periods. An equal thrust in the next period is difficult to manage but a general drift in the direction of the first five minutes is likely with an acceleration after further accumulation has occurred.

 

An open outside the previous day's high or low sets up an intraday Upthrust or Spring in most cases.

 

The most important types of price action have been described already and occur in the first 5-10 minutes of trade, but there are times when even with a defined thrust the market will not follow through, and in fact, will sometimes reverse completely.This is defined as EE Failure and is associated with a momentum increase in 'the opposite direction of EE.

 

An increased range relative to the previous unit and units shows an increase in momentum. Ideally, this should not happen, and when it does it usually indicates an EE failure is occurring. As a rule, no counter move five minute unit (bar) should have a range larger than the first five minute bar.

 

 

In fact, any 5-minute bar against EE that is relatively large compared to previous bars that confirmed EE, will imply a shift in momentum and possibly EE failure. Neutral or confirming price action is crucial just after the EE indication. When Entry is taken on a pullback, narrow range bars should be present on the retracement. A counter move with a momentum increase is a warning that failure is occurring.

 

Profits should be taken after an ORB entry when recognizable shifts in momentum occur like that at.

 

Price action should not fall back into the first 5-minute bar as quickly as it did here.

 

The type of price action that takes place on EE shows that participants are urgent about entering the market.

 

A clear EE and an ORB should not be faded and suggests that a one directional move is coming up.

 

Absence of EE without clear getaway on an ORB calls for trading range action with a market generally unable to trend. When trading is defined one can anticipate reversals throughout the session.

 

I have found that these measured moves off the open set the tone for the rest of the day.

 

These are very high percentages and suggest that after a bull move of this magnitude (off the open) you should look to buy a break.

 

The tests support an important conclusion about the market's nature. That is, the market's tendency to carry in the direction of a defined move off the open.

The market shows a tendency to trend in the direction of a move off the open. Sell a low momentum rally after the initial decline.

 

Supports the conclusion that the market has a tendency to trend after some definition of direction. Buy low momentum breaks after the initial rally off the open.

 

The move off the open by the predetermined amount usually was profitable if followed in that direction. In other words, buys were profitable when taken after a move above the open and sales were profitable when taken after a move below the open.

 

NR4: The narrowest daily range relative to the previous three days daily ranges compared individually.

 

NR7: The narrowest daily range relative to the previous six days daily ranges compared individually.

 

The suggestion from these results is that one should be looking to go with a forceful move off the open after a contraction and not willing to do so after an expansion. In fact fading price action off the open, with trend, after an expansion is a consideration.

 

If nothing else, one should be aware of the dangers of ORB trades the day after a big directional day. Caution is necessary after expansions.

 

WS4: Is a day with a daily range that is larger than any of the previous three days ranges.

 

 

WS7: Is a day with a daily range that is larger than any of the previous six days ranges.

 

Computer studies suggest that Inside Days (ID) provide very reliable entries in the S+P market.

 

Inside day is defined as a narrow range day that has its daily range completely within the previous days range.

 

A doji line is then defined as a day that shows the difference between the open and closing prices to be very small.

 

The strategy is to look closely at the movements that follow the doji line and be ready to enter the market aggressively once subsequent price action gives a clear indication of the markets direction. Logically, the opening range breakout technique would seem a valid means of determining the direction of price after a doji.

 

Results were impressive and confirmed the conclusion that a doji line precedes reversal action or trend type action.

[idaxtrader 10]

A trade taken at a predetermined amount above or below the open of a given day is called an opening range breakout.

 

The hypothesis is that the NR 4 tends to precede trend day activity and consequently successful opening range breakouts.

 

The comparison of NR4 with any day shows a general increase in reliability for ORB after the NR4.

 

Percentages definitely suggest trending is taking place after a Doji that is also a NR4 day.

 

The hypothesis is that an Inside day (ID) that is also a NR4 tends to precede Trend Day activity. The assumption was made that the two patterns combined, which were both successful individually, would tend to produce even clearer indication.

 

All percentages were higher for the ORB after an NR7 than an ORB taken on any day.

 

Specifically, 2 Bar NR is defined as the narrowest two day range relative to any two day range within the previous twenty market days.

 

Three bar NR is defined as the narrowest three day range relative to any two day range within the previous twenty market days.

 

That there is a marked tendency for the market to trend intraday the day after the pattern has formed.

 

The bigger the gap, the more likely the market is to go in the direction of the gap. An ORB in the opposite direction of the gap becomes less profitable and eventually unprofitable the bigger the gap.

 

If the gap is not filled or if the market on the day of a gap cannot return to previous days range by mid session, the chance for continuation are high. Obviously, the larger the gap the more likely for this to occur. On a large gap ignore ORB against the gap unless it is occurring within the first 5-7 minutes.

 

As a rule, trades taken in the direction of gaps should be done cautiously and in coordination with other information.

 

Evidence clearly suggests that Opening Range Breakout trades are not something that should be taken every day.

 

Bear hook is defined as a day in which the open is below the previous days low and the close is above the previous days close with a narrow range relative to the previous day. As implied by the name there is a tendency for the price action following a bear hook to move to the downside.

 

Bear hook days have provided clearer indications than bull hook days in general.

 

Bull hook is defined as a day in which the open is above the previous days high and the close is below the previous days close with a narrow range relative to the previous day. As implied by the name there is a tendency for the price action following a bull hook to move to the upside.

[idaxtrader 10]

Since I'm on the topic of Opening Range tactics I thought I would post my notes from The Logical Trader.

 

 

In trading, as in life you need a plan. This plan includes not only the micro- a strategy for each trade you make- but also the macro- meaning why you trade, how you intend to reach that goal, and what you'll do as an alternative if that doesn't work out.

 

I've observed that very few people operate according to a plan. In a micro sense, to many traders are undisciplined in their trading. They try to pick tops only to have the market keep rallying, or they buy what they think is a dip, only to have the market fall some more.

 

Rather what matters most is a plan- your plan- to get where you want to go, with a back-up in case that doesn't work out.

 

If the ACD is the one missing indicator, then there is no trade.

 

ACD starts with the concept of the opening range.

 

If you a short term trader you may decide that the opening range you'll use is five minutes. The key is to define the time period for the opening range and then be consistent when you trade using that time period.

 

Based on the opening range, the A point to enter a long or short position is plotted above or below the opening range,based on set variables.If the market were to immediately trade above or below the opening range and reach the price level and trade there for a period of time equivalent to half the opening range time frame.The market has established an A up or A down

 

There is only one A per day. That means, once an A up is established, there can be no A down for that trading day. Or, id an A down is established, there can be no A up for that trading day.

 

Once you have established a A- up or down- your stop for getting out of an unprofitable trade is B. The B level, where you would be bias neutral, is delineated by the opening range.

 

In a A up your stop to exit the trade would be at the lowest end of the opening range.

 

Point C is the crossover point at which your bias shifts from bullish to bearish, or vice versa.

 

If you have a C down, the stop- known as point D- would be 1 tick above the top of the opening range. (If you have a C up, the point D stop would be 1 tick below the bottom of the opening range.)

 

I'm here to state that time is the most important factor in trading. If the scenario you've envisioned doesn't materialize within a certain time frame (20-30 minutes) then just move on and look for the next trade.

 

As a minimum the market must trade at a certain level for a time period equivalent to half the opening range.As a maximum if the market has not acted the way you expected within a time get out.

 

If your day trading and have an opening range of 5 minutes, then the market must spend at least 2 ½ minutes at your A level.

 

At this point, with a failed A down. Your risk of establishing a long position after the snap back is small, as long as you know where you'd get out if you're wrong- the A down target.

 

Establishing a short position on a failed A up or long position on a failed A down provides the potential to make a profit that far outweighs the risk.

 

An A up was established and now the market is back below the A up point. You should be waiting for a point of reference to initiate a long position.

 

A rubber band trade is made when the market approaches or just touches a target and snaps back. In that instance, you would go short just below the A up or go long just above the A down. Your stop on the trade would be the A up/down price point. Or, you'd exit the trade if the market didn't move in the direction you anticipated within your time frame.

 

Whats important to note is that this system is comprised of price reference points.

 

Points of reference in ACD give you something to lean against as you make traded. At all times, you know where your getting out if your wrong. The result is confidence ti trade.

 

Using the rationale that you always know where to get out if your wrong, you can use the ACD systém to do other types of trades such as buying dips and selling rallies, with ACD points as references.

 

According to the ACD systém, once an A is established, your bias has to reflect the markets relation to the opening range- long above it and short below it.

 

Lets say the market makes an A up. You exit at a profit. Now the market trades lower and goes below the point A. But its still above the bottom of the opening range. You still bias the upside and decide to buy the dip. Your stop point- where your bias turns from bullish to neutral -would be the bottom of the opening range.

 

Once the A up or the A down is established you retain a bullish bias above the opening range and a bearish one below.

 

Using the reference points of the systém you'll be able to draft your strategy- always knowing where you'll get out if your wrong.

 

1.Plot point A's and C's as points of reference.

2.Lean against these reference points as you execute your trades

3.At all times minimize your risk

4.Know where you are getting out if your wrong

5.If you can answer 4 you will trade with confidence

 

 

Now lets say it makes an A up and trades higher, then starts to sell off. It approaches your C down price level. But instead of trading at that price and then going lower it behaves like a rubber band traded higher. That is a classic failed C down. After the bounce off C you get long. Your stop would be point C at which you'd have to abandon your upward bias.

 

Now what was the rule he forgot? He didn't know where he was getting out when he was obviously wrong.

 

The pivot range is where the market is likely to find support or meet resistance. If it manages to break through the pivot range, the market would likely make a significant move in that direction.

 

Daily Pivot Number: H+L+C/3

 

Second Number: H+L/2

 

Daily Pivot Differential: Difference between daily pivot price and second number

 

Daily Pivot Range: Daily Pivot number plus or minus the daily pivot differential.

 

Where the market closes in relation to the pivot range gives an indication of sentiment

 

If the market breaks through the pivot range you could expect a significant move in that direction.

 

In this example with a long position bias initiated above the pivot range, your stop would be the other side of the pivot range, at which your bias would shift to neutral.

 

At this point you are watching to see if the stock does indeed trade below the pivot range. If does you have a bear bias. Your stop would be the top of the pivot range.

[idaxtrader 10]

The first combo strategy is a Point A through the Piovt. (called A through the pivot)

 

At first glance, you know that sets up a bearish tone for the next day since the settlement was below the pivot range. Assume that the market does trade higher,easily penetrating the lower end of the pivot range and trades all the way to the other side of the pivot range which is where it also make an A up. At this point the market has made an A up and has traded through the pivot.

 

The stop for a simple A up is point B, which is just below the bottom of the opening range. However, going long with an A up through the pivot, your stop would be just below the bottom of the pivot range.

 

Going long at a Point A up after the market trades through the entire pivot range increases your confidence to make a trade. Putting your stop just below the bottom of the pivot range minimizes risk.

 

In other words, if the pivot is sitting above an A up or below an A down you might as well wait for the market to take out the pivot and confirm the A is really valid.

 

Going short after the market makes an A down through the pivot increases your confidence in the trade. Minimize the risk by putting your stop just above the top of the pivot range.

 

A failed A occurs when the market touches or approaches an A up or A down, but doesn't spend enough time there to validate the point. Or, it approaches an A up or an A down , but snaps back, which we called a rubber band trade. No if the situations occur with a failed A in the pivot range- meaning the market just barely makes it into the pivot range but snaps back before the point A your conviction to trade the signal increases.

 

The failed A coupled with a failure within the pivot range increase the likelihood of the market reversing to the downside. You'd have a stop one tick above the pivot range.

 

Good A up through the pivot range: Buy the A up through the pivot. Put stop just below bottom of pivot range or use a time stop.

 

Good A down through the pivot range: Sell the A down through the pivot. Put stop just above top of pivot range or use a time stop.

 

Failed A down against the pivot: Buy the failed A down through or against the pivot, as the market snaps back. Put stop just below the bottom of pivot range.

 

Failed A up against the pivot: Sell the failed A up through or against the pivot, as the market snaps back. Put stop just above the top of pivot range.

 

If the market, makes an A down early in the day, then rallies through the opening range and through the pivot range to make a point C on the upside. Place stop just below the bottom of the pivot range. (Point C through the pivot)

 

If the market, makes an A up early in the day, then sells through the opening range and through the pivot range to make a point C on the downside. Place stop just above the top of the pivot range. (Point C through the pivot)

[idaxtrader 10]

After reading Mark Fishers book it created an interest in me to fiddle around with modified pivots and similar concepts. I will post some of the easier to find formulas right here.

 

PIVOT POINT:

1. (H+L+C) /3

2. (H+L+O) /3

3. (H+L+C+O) /4

 

PIVOT RANGE:

 

Daily Pivot Number: H+L+C/3

 

Second Number: H+L/2

 

Daily Pivot Differential: Difference between daily pivot number and second number

 

Daily Pivot Range: Daily Pivot number plus or minus the daily pivot differential.

 

 

R1:

1. 2 X PP-L

 

R2:

1. PP+ range

 

R3:

1. H + 2x (PP-L)

2. PP+ range x 2

 

R4:

1. PP+ range x 3

 

 

S1:

1. 2 X PP-H

 

S2:

1. PP - range

 

S3:

1. L-2 x (H-PP)

2. PP - range x 2

 

S4:

1. PP - range x 3

Edited April 19, 2008 by idaxtrader
Daily Pivot Range