How to Follow the Leaders

[edabreu 10]

In trading, there will always be a profit and a loss per transaction. When going from sim trading to cash trading the market will seem like a new reality no matter how well you did with sim trading your strategies. Your presence in the market does count. Your actions in the market will create a consequence. The forces you will be dealing with in the real cash market will act upon you, and you will affect the outcome of your trading in a very direct way. So, while you are following along in sim be aware that there will be at least a 10% loss of everything when you go to cash trading until you have made the mental and emotional adjustment. In other words, you will have to adapt to the real cash market beyond the technical. So, the higher and more sustained positive performance level you achieve in sim will go a long way towards helping you while you are making the adjustment.

 

One to the primary approaches for many new traders is to attend a moderated trade room and follow the moderator's trades. The reasoning for this approach is to make some cash while trying to learn how to trade. I will call these the type C traders. It is not a bad approach. It tends to cost a lot more in terms of money and frustration than the other types. It tends to lead the trader into a limbo state where there is never a clear goal oriented path with a clear time line and defined educational foundation. These type tend to flounder a lot. Following a moderator is not as easy a task as you think. Also, learning another s trading method while trying to earn money at the same time can lead to focused confusion. Should I take this trade in real cash or sim? Which setup is this, and did this strategy work last time? This approach creates more questions than it answers. Also, this type of trader is more susceptible to becoming a cash cow for the trade room owners. This type more easily falls prey to the idea that one strategy or method is superior to another. They are more likely to embark on the holy grail search.

 

Other traders really don't focus so much on learning, or approach learning as a vague by product. These traders just want some reliable trade room moderator or lead trader to give them profitable trades on a steady basis. They come into the trade room 30 minutes after the open or 25 minutes before the close. They want the first trade to be the winner, and they want it to be easy and fast. They expect the lead trader to be responsible for their results and blame the lead trader when they are unable to make a dime following them, while the moderator seem to make his/her daily goal consistently. Let's call these traders the type B trader. When the lead trader goes through a draw down period, most of this type of trader leaves to find some other moderated trade room. Following a lead trader is not as easy as it sounds. It is tough to trust your money to someone else. It is even tougher to leave your thinking to someone else, at least it is for me. This pattern of behavior is, to me, the losers pattern.

 

There is a third type of trader among the many types of traders. This third type of trader I will call type A, or the potentially great trader. This type approaches trading as an activity to be learned and studied. They are usually self reliant, are not looking to make money immediately or for the short term. They have an aversion to being spoon fed, and would rather learn to fish for themselves. The potentially great trader is willing to go through a structured learning program that may take them months to complete. This type of trader is more likely to discover, in a relatively inexpensive fashion, much of what the other trader types never learn until they have blown out a few accounts and spent a couple of years in a continual state of frustration. This type of trader will wait until they have met some kind of qualifying standards. They will probably spend a lot of time testing the strategies they learn with a defined performance goal in mind. They will most likely enter the market with a lot of confidence and belief in their strategies that is based on firm statistical performance levels. They will most likely have developed very good trading habits and good technical and money management decision making habits before they ever risk real cash. This type of trade will probably spend most of their time in the real cash market working on self control and not strategies, not indecision about when to get in or out, not on wondering if they should let a trade run, or take a scalp. In other words, they will know themselves as traders a lot more precisely than the the other types. This type of trader will have a better understanding of the role that statistical probability plays in the outcome of each trade, and will have a better understanding of themselves and their capability of trader. They will more likely have arrived at trading goals based on what they are able to do consistently rather than what they want. This type of trader is more likely to associate with other similar type traders in a private atmosphere. This type may also from time to time use mentors or structured educational courses to help them along in their studies.

 

More often than not, these are the survivors. They took their time, did the work, made and survived their mistakes, learned from the mistakes of others, and grew into a consistent trading pattern of behavior that leads to sustained profitability. This type takes the longest to cultivate.

 

For you B types I offer this idea. I hear there is a sure fire trade room guaranteed to make you money over on relay 1. You can subscribe for only $300 a month forever. They trade from 9 to 3 everyday, all day. You can just pop over during lunch and make a few hundred every day! Don't quit. Keep trying. I need you to keep trying. Please keep trying.

 

For the C types I offer these ideas. Suppose you decided to not make money trading for at least 1 year. Take this year to open a chart and stare at it for at least 3 hours a day, 5 days a week. The first month just watch it, and take notes of what you see happening. Describe the events. You can put a few indicators on the chart, but nothing predictive. Just put on some lines describing yesterdays hi, low, open and close. Keep it simple. Just use the session chart. Spend the first month watching what happens at these areas. The second month you can start to mark on your chart the defined events you have observed. Only the define the familiar reoccurring events, not the anomalies. Describe these events with just a word or two. During this second month, observe the reaction of price at these defined events. Define the outcome of these events. What did price do? If you have trouble recognizing repeated patterns, you can add one or two predictive indicators. Keep it simple. Add a moving average, and maybe add some kind of non price based oscillator. Now describe things in relation to these tools. Or, you can add just a trend line and some kind of line to indicate dynamic events that are created by price during the last x bars. If you are using candles, then take note of the most significant candle patterns at the static areas of yesterdays hi, low, close, and today's open, current hi, lo. Do not get too sophisticated.

 

The third month, do something when you recognize the reoccurring event, and see what happens. Record the outcome of your actions. Do this for the next 3 months. By the 6Th month, you should have some statistical records of all this activity. You may want to use another chart with a larger point of view, and while you are reading about how the market is structured you may discover things like volume distribution and accumulation, and theories about market psychology, and mass hysteria and panic. Do not let yourself be too influenced by these concepts. For this first year your goal is just see what you can see, and do what you can do, and decide if there is any value to it.

 

Over the course of the next 6 months, see how many times your actions at reoccurring familiarly defined events produced a positive outcome.

 

So, yes this is a lot of work. There is no immediate reward to this, and there is no guarantee that all these months of activity will produce any kind of positive outcome at the end of one year. So, if you cannot see yourself doing this, then re-read about the trader types. Decide which one you want to be, and take steps to cultivate yourself.

 

If you do not know what steps to take, seek out other A types and see if they can offer you some guidance. The most important elements to look for in another A type trader is consistency of actions, historical records of past actions, and their ability to convey ideas understandably. If they are willing to let you watch them trade, great! Not all of these types make good coaches or teachers. More often than not, you will have to bug them for their experience.

 

Most A type traders were once C or B types who just got fed up with losing and decided to do whatever they needed to become winners.

[peterjerome 10]

In trading, there will always be a profit and a loss per transaction.

 

question on stock in uptrend:

11/29/11 buy "M" @ 43.38

11/20/11 sell "M" @ 46.10

 

as long as stock trends up is there a loss here?

 

peter

[bobbhim 10]

Very good post. Good lesson for all. Thanks

[FX_Neil 10]

Brilliant article, thank you for taking the time to write this down!

Neil.

[steve46 12]

question on stock in uptrend:

11/29/11 buy "M" @ 43.38

11/20/11 sell "M" @ 46.10

 

as long as stock trends up is there a loss here?

 

peter

 

 

Thank you Peter....there is so much useless urban myth posted by folks here....it is gratifying to see someone able to think critically about a subject.....best of luck in the markets.

 

Steve