Timeless Trading Wisdom – How To Correct Common Trading Mistakes

Excellent article about common trading mistakes and solutions to these trading problems. Most often these trading errors are due to mental and emotional issues that affect our decision making process. I do agree with everything Tyler Bollhorn wrote. Do yourself a favour and read this. As he suggests at the end of the article it will help you become a better trader. Enjoy!

The article is from Tyler Bollhorn of Stockscores:

I have often said that making money trading stocks is simple, but not easy. Once you learn basic technical analysis techniques, have good tools to identify opportunities and gain some experience at identifying good trading opportunities, the actual job of picking stocks is relatively straightforward. Where most traders fail is in the application of a methodology. The simple and undeniable fact is that we are all human, and therefore, we are all blessed with emotion. When money is on the line, our emotional attachment to it can take over our decision making process. With that said, I thought it would be helpful to examine the common problem areas that are a result of mental breakdowns. By examining the emotional conduits to decision making, hopefully I can provide some solutions to correct common trading mistakes.

Trading Problem #1 – No Patience on Entry

Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.

The Solution

The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.

Trading Problem #2 – Selling Too Soon

We have all felt the disappointment of not selling a stock at the high. When a stock is marching higher, we set a point where we intend to sell so that we can lock in the gain before it goes down. The problem is that after we sell the stock, it continues to go higher leaving us with an opportunity missed. Selling too soon is a problem that I continue to wrestle with after 15 years of trading stocks. I want to lock in that good feeling of taking a profit off the table. I want to avoid the negative feeling of watching a good profit get cut in half by a rapid sell off. And so, I break my selling rules and sell the stock in anticipation of weakness, rather than when the market tells me I should. The result is that profitability over the long term is not maximized. Once in a while, I may get out of a trade at a better price than I would if I followed my rules, but over 10 or more trades, my net profitability is not as good as if I had maintained my selling rules. Keeping in mind that trading stocks is a probability game, it is important to maximize gains on the winners so that the inevitable losers can be overcome.

The Solution

There are few things that can help you avoid falling in to this trap. First, go through a number of past trades and apply your selling rules to see what your net profitability would have been if you have been disciplined, and compare those with what you actually achieved. I did this and it gave me powerful proof that maintaining discipline pays off, and is worth striving for. In fact, when I did this over one particular one week period, the difference amounted to a pretty nice new car! That gave me the leverage on my emotions I need to overcome them. Second, turn off the profit and loss indicator that most brokerages and trading platforms give you. How much you are up or down is irrelevant to the decision making process. Since we have an emotional attachment to the money, knowing that we are up a certain amount and then seeing that shrink on a normal pull back in a stock leads us to make an emotional decision. Finally, remember to sell at floors, not ceilings. Do not limit the upside movement of a stock by setting a price target, but instead, limit the downside movement by setting a price floor. Sell a stock when it pulls back to a floor, rather than selling it in anticipation of it reaching a ceiling price.

Trading Problem #3 – Letting Small Losses Turn in to Big Losses

As I just mentioned, trading stocks is a probability game. You will not be right all the time, which means that one of the most important aspects of trading stocks is to never let small losses grow in to big, portfolio debilitating losses. You have to limit losses at a risk level if you are going to be successful over the long run.

Solution

The simplest and I think most effective solution for most people is to set a stop loss point before purchasing a stock, and apply it immediately after purchasing a stock. Use basic chart analysis to determine where the market will have proven your decision to enter a trade wrong, and set your stop just below that. Automated stop losses are best because they do not require you to have the discipline to pull the exit button. Do not change your stop once you are in the trade. Making the stop loss judgement before you enter the trade is best since you will not have an emotional attachment to the stock at that point since you have not put your money on the line yet.

Trading Problem #4 – Trading Low Probability Opportunities

My dad is one of those do it yourself guys who would rather work hard than have someone else do the job for him. As a kid growing up, that meant that I helped build fences, garages, basement developments, pour concrete driveways, do yard work and generally learn that same ethic to work hard. I am thankful that I have that spirit, but in the early stages of being a trader, it was something that hurt me. The stock market can not be made to go your way by hard work. There are times when the market giveth, and there are times when the market taketh away. The legendary Vancouver stock promoter Murray Pezim once said that all abnormal profits in the stock market are just short term loans. His point is that people do not know when to leave the market alone, and when it is time to work hard Traders will tend to take low probability trading opportunities at the worst time, because it is during weak market conditions that the market only shows marginal opportunities. By working really hard, traders can find opportunities that are pretty good, but not great. By taking these lower probability trades, the trader sets him or herself up for failure, since their rate of success will not be as good.

The Solution

I have said it many times, when the going gets tough, tough traders get lazy. You must always be picky about the kind of trades you make, particularly when the market is weak. Working hard to find opportunities will not make you more money, working hard at being disciplined will. Teach yourself to look forward to the slow times. Make a list of things that you are going to do when the market slows down. Plant a tree, play golf, kill the ants that are crawling around your house. Just make the list. Perhaps most importantly, if you depend on the market for a paycheck, make sure that you bank money when the market is good so that you don’t have to trade when the market slows down. Making a trade because you need to pay some bills is not a good way to trade.

Trading Problem #5 – Overtrading

There are stock traders who make 150 or more trades in a single day. I am not sure they make a lot of money. I firmly believe that you can make more money by making fewer trades because it will make you focus on only the best of opportunities, and play them with a larger amount of capital so the pay off is better. By being patient and disciplined with the really high probability trades, you can maximize profitability.

The Solution

If you are currently making 50 trades a week, tell yourself that next week you will only be allowed to make 10. If you are making 20 a week, promise yourself that you can only make 5. Don’t just tell your self that you are going to stick to your new rule, write it down! By setting this limit, you will hopefully change your outlook and try harder to only consider very high probability trades. We want to focus on great trading opportunities, not just those that are good.

Trading Problem #6 – Hesitation

You are watching a stock that has all the signals you look for in an opportunity. The proper point to enter comes, but you wait. You second guess the opportunity and don’t buy the stock. Or, you bid for the stock at a price that is not likely to get filled if the opportunity does pan out the way you anticipate it will. As a result, you get left behind while the market pushes the stock higher. A short while after the initial entry signal, when the stock has made a decent gain, you decide to finally enter the trade. After all, the market has proven your analysis correct, so you must be smart, and right! Not long after you enter, the stock turns south and you end up with a losing trade. If only you had bought when you first thought about it.

The Solution

This is really just a confidence issue. You are either not confident in your ability to analyze stocks, or you are not confident in the methodology that you are using to pick trades. Therefore, you have to research your method so that you have the confidence that it works. Then, you have to start small, making trades that have a potential loss that you are comfortable with. As you gain confidence in your method and your ability, increase the trade size. With your new found confidence, stand in a crowded room and scream, “I am great!” Well, maybe don’t carry it that far.

Trading Problem #7 – Letting Winners Turn in to Losers

The final trading problem that I want to focus on is allowing winning trades to turn in to losers. Many of us have probably had a time when a trade was making big loot, and we started to count the profits like they were ours before we exited the trade. When the stock started to lose the ground it had gained, we avoided selling because we had built up an emotional attachment to the paper profits we had seen. Instead of selling the stock to lock in some gain, we opted to hold out for the stock to go back to where it used to be, promising to sell when it came back to the point where we felt good about the trade. The stock drifts lower, and eventually the gain turns in to a loss. We ultimately sell it at the bottom, swearing never to do it again. But without some reprogramming, we probably will.

The Solution

Like Kenny Rogers used to sing, “Don’t count your money, when you are sitting at the table, there will be time enough for counting, when the dealing’s done.” Do not calculate your profits before you lock them in. Avoiding the profit watch will help you avoid an emotional attachment to the paper profits, giving you greater clarity to take the exit door when the market tells you it is time to do so.

I hope this outline of mental problems and some solutions helps you become a better trader. The difference between those who succeed in trading and those who fail is not the system they play, but how well they play it. Your mind is a powerful thing, don’t let it beat you in the market.

Linda Bradford Raschke – 50 Time Tested Classic Stock Trading Rules

Excellent trading advice from Linda Bradford Raschke which makes for a great addition to myTrading Rules. Check them for more trading rules from great traders.

1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses – use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray – jump!
49. Lose your opinion – not your money.
50. Assimilate into your very bones a set of trading rules that works for you.

Have a great day!

Trading Rules

Small losses
Avoid big losses at all cost. The higher your percentage loss, the higher the percentage gain you need to get your money back. With a 50% loss you need a 100% gain to break even.

Control risk
Know your exit criteria before you enter a trade. As soon as the reason for your entry is not valid anymore exit the trade. I typically use hard stop losses.

Liquid stocks
Liquid stocks are easier to exit. As a matter of fact technical analysis is more reliable with highly liquid stocks. Lots of volume makes it more difficult to manipulate stocks.

Trade strong stocks
A strong stock has no overhead resistance and is trading near its 52 week high.

Just the charts
Never call a company for more details. Their job is to run a business. Trading for a living requires different skills. Everything you need to know is right there in front of you. If you can’t see it – it probably isn’t there.

Pressure
The stock needs to display some kind of basing pattern or consolidation pattern. Buy the stock near its initial breakout. Don’t chase stocks.

Market analysis
You need to know what kind of stage your stock is in. Stan Weinstein explains the different stages in his book. Trade in the direction of the primary trend.

Discipline
Stay disciplined. Keep emotions in check. Emotionally detached traders yield better results.

Cycles of Market Emotions

Here is an article about cycles of market emotions by Mike North from First Ag Capitol. I liked the article as he explains the emotional cycles of our trading decisions. Read on and then decide which state are we in at the moment?

For every market there is a chart. The chart defines that market’s price over time. However, what makes up a price? What influences its movements?

Some will say supply and demand. Others will suggest that the volatility that comes as a function of speculative money flow and the war that wages between fundamentalists and technicians have an influence. Whatever flavor you choose, one thing is certain … it moves.

What is more interesting is what happens as it moves. As prices continue to move and adjust, people will be monitoring actual value relative to their expectations of the future.

It is no wonder that when prices move lower, the world does not seem fair. Anxiety, denial and fear grip the producer as he watches opportunity pass. Desperation and panic set in as they watch their cash flows take on darker shades of red. People begin to realize that they have yet again missed an opportunity. Statements like “If only I would have …” or “I could have …” or “I knew that I should have …” are tossed around frequently. The “woulda, coulda, shoulda’s” create a sense of self-defeat that makes one feel like waving the white flag of surrender. Hopelessness and depression define the human psyche. How could it get any worse?

But, alas, it is over! The market begins to rebound. Hope bubbles until optimism boils over. This new brighter outlook breeds an excitement that grows to a stage of euphoria that people seldom experience. Producers start to feel like they can fly. Times are good. The market begins its move lower and we repeat the cycle once more.

What frustrates me is hearing of how this cycle leads to bad decision-making. Over and over, people allow the desperation of bad times to temper their activity during improving times.People spend so much time charting price that they often forget about the emotions they experienced as those prices unfolded. The chart of your emotion should be watched much closer than the price chart your eyes are often glued on. If people would write down how they felt and what decisions they made as a result of that emotional response to price, their risk management success would move to a much higher plane.

Can we agree on something? Let’s agree to not allow this emotional roller coaster to dictate our reaction to price opportunity. As you navigate your marketing plan, please do this – chart yourself.As you track your emotions, spend some time thinking of the past. What were your best years emotionally? What were your worst? It is interesting that as I ask this question in crowds, I often find that their emotions very closely follow price.

People often suggest we would be better off with more stable prices that move little and seldom change. They are not suggesting this because it would do their business better. The root of that comment comes from a desire to get off of the emotional roller coaster. I grant you that wish. However, that does not mean that something will magically appear and your life will forever change. I challenge you to understand you.

Price cycles create more emotional predictability than market certainty. If you can pattern yourself, you can corner the market of “you”. Doing so will help you more clearly see opportunity through the lens of reality. I bid you well.

THE SCOOP PATTERN

The Candlestick Scoop pattern is shown in the following figure. As one can see, it looks like an ice-cream scoop.

The Scoop pattern has two parts to it.
- The handle
- The scoop

The handle is the flat part which mostly consists of indecisive trading. One mostly finds Spinning Tops, Doji and small bodied candles in this part. It could also be a very small trading range congestion zone. The bears and the bulls are locked in a fight and this fight can go on for days, or in some cases, weeks. The congestion zone is the area where supply and demand are fairly balanced. Any disturbance on one side is immediately compensated by the other. Then one day, some bulls give up hope that the position will make money. They start selling, casuing prices to go down. However, the lower prices starts attracting new bulls who drive the prices higher. this new surge and interest in the stock, causes more bullish traders to jump in the position, thus creating a scoop type of formation. If the prices can break the congestion zone handle, they can start a new uptrend.

If one notices bearish signals forming as the price approaches the handle area, the scoop pattern might not be able to complete itself and traders need to exit at that point.

The following chart of chart of BearingPoint inc. shows a perfect Scoop pattern. The handle in this case lasted about a month. This period was obviously too long for traders to keep holding the position without any potential gain in sight. The selling was stopped by a Bullish Harami, which attracted new buyers in the stock. This should have immediately alerted a candlestick trader that the possibility exists for a Scoop pattern formation. Notice that there were no indecisive or bearish signals forming as price approached the handle area. This should give the trader the confidence that the Scoop pattern is going to breakout the price.

The J-Hook Pattern

Today I will be talking about the J-Hook Pattern. It’s a bullish continuation pattern that is pretty easily identifiable and highly reliable. This long pattern occurs during all trends (up, down, sideways), thus giving you flexibility in all market conditions. It is also considered a momentum play.

Not only that, if you miss the initial entry point, there is usually a secondary entry point. So whether you catch the pattern in the middle of the “J” or towards the top, there is always an opportunity to profit on the long side using this pattern.

Here’s a diagram that I drew up:

The J-Hook during an uptrend:

-Needs an existing uptrend on strong volume
-Needs a price correction on lower volume (*for the difference between a price & time correction, see diagram at the bottom of the post)
-Will show price bars expanding and volume expanding at pivot
-Initial Entry: a breakout on strong volume above the previous peak
-Secondary Entry: either during the formation of a bull flag/pennant, or on the breakout exiting the flag/pennant.

- – -

The J-Hook during a downtrend:

-Needs existing downtrend that is exhibiting an exhaustion in selling pressure.
-The pivot point is usually marked by multiple doji, hammers, and other reversal candles.
-Volume will generally be higher during the downtrend, but should lighten up when most of the selling is finished.
-Initial Entry: on a strong breakout above major downtrend resistance. Usually, this is marked by a strong gap up on large pre-market volume.
-Secondary Entry: either during the formation of a bull flag/pennant, or on the breakout exiting the flag/pennant.

- – -

The J-Hook within a neutral range:

-Needs existing neutral range on light volume.
-Mark a slight dip below the range with slightly increased volume. At this point, you won’t know that it will be a J-Hook.
-The pattern materializes when you see an immediate reversal as it reaches upper resistance pof the neutral range.
-Initial Entry: a breakout above the neutral range on strong volume.
-Secondary Entry: either during the formation of a bull flag/pennant, or on the breakout exiting the flag/pennant.

Here’s an example of today’s neutral range J-Hook pattern ($MBI):

*The difference between price & time corrections:

Head and Shoulder (H & S) Chart Patterns

The head and shoulders chart pattern is a pattern that falls into the class of bearish reversal chart patterns. Head and Shoulder chart patterns occurs at the top of a trend and is usually used as a determinant of a bearish reversal of the existing bullish price action.

A head and shoulders Forex chart pattern is made up of:
1. Candlesticks that form a crest (the shoulder 1)
2. Second crest which is usually higher than the first one (the head)
3. Third crest which is not as high as the second, and may or may not be as high as the first crest (shoulder 2)

Head and Shoulder chart patterns can be a bottoming formation after a downtrend or a topping formation after an uptrend. The bottoming pattern is a low price then followed by a retracement then a lower low, the head, and a retracement then a higher low which is the shoulder. On the flip side, a topping chart pattern is a high followed by retracement then a higher price high and finally a lower low. Head and shoulder chart pattern is complete when the trend line which connects the 2 highs, bottoming pattern, or 2 lows, the topping pattern, is broken.

Application of Head and Shoulders Chart Patterns

To be able to identify Head and Shoulders chart patterns, there are 3 crucial things:
1. Have an eye to see how the candlesticks line up
2. Have the ability to use the drawing tool of your Forex trading system to make the appropriate traces across the highs of the candlesticks
3. Draw a correct neckline, which is the landmark for the trade entry
You should ensure that the head and shoulder have to fully form with the 2nd shoulder being almost complete before placing a Sell stop. The Sell stop should be placed about 5 pips or ticks below the neckline. When you are using Head and Shoulders chart patterns to trade in the Forex market you should know that the extent of the bearish reversal of the price action is equidistant to the distance between the neckline and the peak of the head. This is the profit point you should be eying. It is worth mentioning that the entry signal is usually reinforced when the price action is in an overbought region or is at a resistance level. 

It is very important that traders wait for the head and shoulder chart pattern to complete before they make a move. One should not assume that a pattern will develop, or become complete in the future. You should watch partial patterns keenly but you should not make any trades until the head and shoulder pattern breaks the neckline. The neckline is the landmark for the trade entry.

On the other hand, for the inverse head and shoulder, you should wait for price movement above the neckline after the right shoulder to be formed. A trade can be initiated as the chart pattern completes. You should always plan your trade beforehand, jotting down the profit targets, variables that may change your revenue target, entry as well as stop points.
Just like there are two sides of a coin, trading using head and shoulder chart patterns has its limitations. First and foremost the chart pattern is not perfect and as such can fail at times. This chart pattern is not always tradable. For instance, in the event that there is an extensive drop of one shoulder due to unpredictable even then there is a high likelihood that the price target will not be hit. Bearing in mind that you have to wait for the pattern to develop fully, it could mean waiting for longer periods which can affect your trading. 
In conclusion, though head and shoulder patterns can be subjective at times and take long to develop, the complete chart pattern provide entries, profit targets and stops making it easier to implement a trading strategy.

Leading Indicators Vs. Lagging Indicators

Investors that find themselves falling in the more traditional category of fundamental analysis often have many criticisms for those regularly implementing technical chart analysis as a basis for trades. Generally speaking, these criticisms suggest that charts “have little to do” with the economic drivers influencing market valuations or that previous price action has nothing to do with where valuations will travel next. In essence, these investors will argue that past performance is not an indication of future market activity. In order for an assessment like this to be accurate, there must be an idea that technical analysis involves only lagging indicators. But is this entirely true? 

When we look at the available charting tools that are available in the commonly used trading stations, a variety of different options can be seen. Specifically, these tools will often be divided into “lagging” indicators and leading “indicators,” and the fact that there are different types of trading tools goes far to dispel some of the misconceptions that are commonly held with respect to technical chart analysis. Here, we will look at some of the differences that can be found in these two types of indicators so that traders have a better understanding of the functions in many of the commonly used trading applications. 

Know Your Indicators 

It’s important to understand the strengths and weaknesses of any indicator before using it in any real money trade. One of the most common mistakes new traders make is to start placing indicators on their charts without having a real understanding of the calculations behind the indicator or the way it is best used in analysis. Some might say that a full understanding of these indicators is unnecessary: Buy if prices fall into “oversold” territory, or Sell if prices reach “overbought” territory. 

Unfortunately, trading is not this simple. If technical analysis was this easy, everyone could be a profitable trader. Even further, we could simply set software applications to find these signals and walk away as billionaires. The reality is that trading takes more work than this, and we will need to do a good deal of homework before we can make our indicators work for us in consistent and repeatable ways. Not knowing the (usually simple) formulas behind your indicators is not an acceptable practice - and it will negatively influence your trading results. Without this, it will be much more difficult to understand the true application behind each type of indicator. 

But before you delve into the specifics of your chosen indicator, you must first understand the types of indicators that are available. The two mains types of indicators are leading and lagging indicators. Lagging indicators alert traders to situations that trends have started and that it is time to pay attention to developments that have already become apparent. Leading indicators aim to signal trend changes before they develop. This might seem to suggest that leading indicators will lead to instant riches but the fact is that the signals generated are not always accurate. Traders using leading indicators will, in many cases, encounter “head fakes” and erroneous breakouts. Trades taken on these inaccurate signals eat into the advantages created by the leading nature of these indicators. But this does not mean that they can not be used to generate consistently profitable signals over the longer term.

Oscillators: Leading Indicators 
When using common trading platforms (such as MetaTrader), one of the main indicator options is the Oscillator. Oscillators are objects that mark two points and move back and forth between those points (always falling inside those points). When the oscillator reaches an extreme area within this 2-point range, buy and sell signals are generated. When seen near the midpoint of this range, the signal is neutral and no trade should be taken. Common examples of indicators include the Relative Strength Index (RSI), Stochastics, or Parabolic SAR. All these indicators help traders identify reversal spaces, as the prior trend reaches completion and prices are preparing to make a forceful move in the opposite direction. In the first chart, we can see examples of buy and sell signals for all three indicators.

As we can see from the first chart, price activity causes all three oscillators to move back and forth between buy and sell signals, creating opportunities in both directions. This chart, of course, represents an ideal example, where all indicators are in agreement with one another. For example, the RSI might show a screaming buy while the Parabolic SAR is showing a sell signal. In these cases, it is better to simply step aside and stay out of the market. Additionally, this is a good reason why traders should not use too many indicators on their charts as this will greatly reduce the number of viable signals that become present during your daily routines. 

Another point to remember is that all leading calculators do not use the same calculations and formulas. The RSI bases its signals on the changing levels in succeeding closing prices. Stochastics uses the highs and lows of price ranges over the time frame shown on your chart, relying much less on successive time periods. Parabolic SAR is has probably the most unique calculations of the bunch, and this can complicate trading signals when combined with other indicators. From this, it should be clear that not all leading indicators are created equal, and traders should practice with a few options before committing to any one choice. 

Momentum Indicators: Lagging Indicators 

The second major category is the “lagging indicator,” which includes tools like Exponential Moving Averages and the MACD indicator. These tools are commonly used to spot trends that are starting or are already in place. The downside to using these indicators is that (since the trend is already in place) your entry signals will come later. This means less profit as a smaller portion of the overall move is captured. The upside to lagging indicators is that they send fewer false signals, which will generally mean that you are stopped out for a loss on fewer occasions. 

In the second chart example, moving average crossovers are seen in conjunction with buy and sell signals sent by the MACD indicator. In all of these cases, the indicators were sent signals (using their accompanying formulas) and then the indicators themselves produces signals shortly afterwards. Here, traders using these signals would have missed some portion of the initial move but the validity of the signals sent would have had a better chance of eventual success. 

Conclusion: Learn about Your Indicators and Play from Their Strengths 

Traders have different types of indicators at their disposal, and this is helpful when looking for tools that fit your individual trading style. Leading indicators sent trading signals before new trends or reversals develop. Lagging indicators use available market information to send trading signals that have a slightly higher chance of being accurate (avoiding false breakouts but missing a portion of the early move). It is up to you too decide which approach best matches your risk tolerance and trading approach. It is possible that some tools will work better in some environments than it will in others, and this is an added reason why traders should practice their routines with a variety of indicators before committing real money to positions.

Managing the Mind That Trades: Micro Management of a Trader's Psychology

What mind do you bring to your trading day? Can you be specific about describing that mind? Have you intentionally organized your mind for the performance of trading centered in patient discipline? Is this carefully prepared mind rehearsed BEFORE you start your trade day so that you are emotionally and mentally fit for the rigors of the trade day? Or is preparing the mind for the performance of trading more of a hit and miss situation?

And if you do bring an intentional mind to start your trading day, what happens to it once you begin your trading day? What is your plan to prepare the mind so that you maintain excellence of execution? Preparing the mind for the trade day is not a sprint where there is initially concentrated effort for a short duration. Rather, it is a marathon where the runner has to take stock of his faculties at various points in the race and manage them for the duration of a long race.

As much as traders hear about how important emotional and mental attitude is in the performance of trading, very few traders actually manage the mind that trades as they move through the process of a trade. In the Traders State of Mind training programs I teach, a considerable amount of energy and training goes into preparing the mind for the trading day BEFORE the day starts. This becomes the foundation from which the trader learns to manage the mind WHILE he is in the process of trading.

In order to achieve a calm, disciplined impartial mind from which to trade (the Traders State of Mind), a trader must be vigilant. This aspect of the management of the mind is focused on getting the brain and the mind ready to trade. Typically, preparation for the trading day begins the night before. And preparing the mind continues when the trader wakes up and before he gets out of bed. Then, always, a period of time is devoted to mental preparation and rehearsal that includes a prayer/meditation/centering period where the trader tunes his mind into the peak performance organization of self that is suitable for trading. It is here that the trader can volitionally construct a mind rooted in calm, disciplined impartiality.

With his mind now calm and ready for trading, the trader starts his day. The earlier preparation readies the trader for the trading day so that he/she is fit to trade from a state of mind grounded in calm, disciplined authority. However, this is not enough. This calm, disciplined authority has to be maintained through the cycle of a trade. Now, let’s take a look at this cycle.

Psychology and Process Conjoin

All that preparation is washed away within a short period of time if the mind is not trained for the process of the trade. What I have found is that the early preparation stage of mental readiness is good for about 30 seconds to 30 minutes. This is where a particular psychology of performance needs to be integrated into your actual trade plan. Your trade plan and your psychological plan are not separate. Your mind is an integral part of the trading system. It is what drives your platform and methodology. So this driver has to be trained to drive his system proficiently.

The following process represents critical stages while trading where you need to be psychologically prepared (trained) to manage the circumstance of the moment.

Watching For Set-ups

Many traders become immediately blinded by an insidious bias while in this stage. With an urgency to act, they approach their charts seeking set-ups. This very urgency to act contaminates the mind that is supposed to be patiently waiting for set-ups. Instead, believing that they have to be "doing something" to be trading, the skill of patience (necessary to wait for trades to come to them) is vaporized from the mindset in a flash and replaced with an urgency to trade. And, suddenly they are chasing trades that are dubious decisions at best.

This bias gets them into trouble because it SETS THEM UP to take trades not in their trade plans or has higher risk to reward parameters than their trade plan dictates. Many a trader has done a good job of preparing the mind for the trade day, only to sabotage themselves at the beginning of the trading cycle due to this bias.

Therefore, this point is critical to managing the psychology of the trading mind. Your job is to patiently wait for set-ups to come to you. Your job is not to make things happen.

A Trade Warms Up

Have you ever noticed what happens in your mind when you start seeing all the confirmation coming in as you watch a possible trade set up? The warmer the trade gets, the more an untrained performance psychology is tested or seduced. This is a moment to take pause and regulate your psychology so that, in your excitement, you do not get in early. Or, perhaps, in your anticipation (untrained performance mind) you keep seeking more and more confirmation until the trade potentiality is over. Is the mind that watches the set up calm, patient, and disciplined? If not, you need to train yourself to be.

Trade Entry

As you go to pull the trigger, what is your mental composition? Are you pulling at the bit to jump in (euphoria) or is your trigger finger paralyzed and incapable of clicking the mouse (hesitation)? This is a moment for which you must prepare. It is not a moment that is pushed aside until it cannot be ignored. All the "man-up"ing you can muster at this point is a dangerous exercise in futility if you have not developed the mind that is prepared for this moment.

Order Confirmation

When they hear that “cha-ching” of an order being filled, something dramatic happens in the mind of many a trader. They are now committed to the trade and there is no way out of it, except through it. Risk is real now and you could lose your money. This is where many traders start a downward spiral in their ability to manage a trade effectively. Their mind has not been organized to bring the proper elements together for trade management.

Traders need to take a pause here and recollect themselves. They have now moved from looking for opportunities to exploit (offensive coordinator) to defending turf (defensive coordinator). It is at this moment that it is critical for the trader to reassert his performance psychology, or it is going to be a long ride down.

In the Red

There is nothing more unnerving for the evolving trader than to watch a trade in flux. The trade is bouncing around and spending a good bit of time in the red. You can see the red indicator light and can feel the fear and excitement. The mind starts really decompensating and the resolve to adherence to the trading plan is taking a beating.
Preparing for this situation should be part of every trader’s practice. The trader must learn to regulate it, or the trader’s performance mind moves from focusing on execution to being fixated on losing capital. The trader’s job is to maintain the mind that is focused on the performance of execution. Yet, an emotional hijacking is underway. This is why this moment in trading needs to be anticipated and trained for. Otherwise, it keeps you from becoming the trader you could be.

Taken Hostage by Marginal Profits

This is one of the biggest moments that separates a scratch trader from a consistently profitable trader. If the trader has not managed the mind that manages the trade before this moment, there is a powerful urgency for him to take the profit early from the trade, while the trade is still profitable. Then when he cashes out and feels the temporary emotional relief, he watches the trades move to his targets – just like his trade plan outlined.

The problem is that the trader’s emotional state has not been managed somewhere along the progression from trade entry, to being in the red while in the flux, to the moment of profitability. Any of these moments can become a signal that triggers the need for practicing emotional state management. Maintaining these critical trade management moments, to the trained mind, are planned for and practiced. The key emphasis here is training. The trader is taking the mind he prepared before trading began and reasserting it – anticipating these moments so that he is prepared for the stressful conditions of trade management.

Exiting a Trade – Taking a Loss

During the process that is being laid out here, the emphasis is on management of the mind that executes the trade – and not on whether you are winning or losing. If you manage the mind that trades so that you execute your trade plan from a peak performance state of mind, your methodology will take care of the winners and losers. Your job is to manage the mind that trades.

The questions to ask when taking a loss are: (1) Was it a method mistake? (2) Was it a psychological mistake? Or (3) was it simply being on the wrong side of probability? If it is a method or psychological mistake, then you learn from the mistake (which is how the brain learns) rather than dwelling on the loss and deepening your fear of losing. If you don't learn from this, you bring this fear of loss into your next trade. And that contaminates the mind that trades.

Exiting a Trade – Winning

One of the most dangerous things that a trader can do is to get excited by a win while he is still trading. (After your trade day is over is the time to celebrate the win.) While trading, the thinking mind is greatly influenced by the emotional state that you bring to the act of trading – particularly to the evaluation of set ups. When you feel good, you are bringing a mind fed by euphoria into the evaluation of set ups. And euphoria will cause you to believe with certainty that the good times are going to roll and then you no longer can evaluate your trading risk effectively.

When you win in trading, the calm, disciplined impartiality you worked to achieve before you started trading is maintained by regulating your emotions and mind. Until the calm, disciplined impartiality is re-established, you are not fit to trade with a mind designed for trading success.

Reviewing Your Trades

Particular emphasis and attention needs to be placed on the mind with which you review your trade day. Are you beating yourself up for the mistakes you made or the lost opportunities you now see in your charts and performance? Or are you acting as a kind, wise teacher to yourself? The latter creates an emotional space for learning to occur while the former creates an emotional vortex that keeps emotional reactivity at the forefront and compromises the capacity for learning

Toward a Peak Performance State of Mind

This is the work of the inner game of trading. Once you establish a process that brings forward into your working mind a peak performance state for trading (calm, disciplined impartiality), then you can begin to practice it in these specific moments in the trading cycle.

The mind you brought to trading is simply not going to be the mind that is going to produce success in trading. The whole notion of winning has to change. Success in trading is not about winning (or losing for that matter). It is about the psychology you bring to execution. It is about the mind that you bring to the performance of trading, so that you execute the trade with excellence. There is no "need to be right" about the trade, only its execution. If you do this, your methodology will take care of the winners and losers – and the money in your trading account.

Why Successful Traders Use Fibonacci Retracements

Support and resistance levels on bar charts are one of the major components in the study of technical analysis in Forex trading. Many traders make use of support and resistance levels to examine entry and exit points when trading markets. When establishing support and resistance levels on charts, a trader should not overlook Fibonacci percentage ‘retracement’ levels.

What is a retracement? A retracement is a pullback of the currency price before the price resumes the original direction of movement. 

What is Fibonacci retracement? Fibonacci retracement is one of the many aspects of Forex market technical analysis. Fibonacci in the Forex market is a type of line study used to predict as well as calculate price pullback levels. It is placed directly on the price chart within the trading platform and this technical indicator will automatically calculate the pullback levels on the currency price chart.

Fibonacci Retracement is used to determine support and resistance levels in the market. Fibonacci Retracement is essentially based on the assumption that the market will follow a predictable pattern and at particular points it will retrace its steps before moving on with its original direction. This technical analysis utilizes ratios from numbers in a series; you can take 2 numbers in the series and divide them to form a ratio. The 2 Fibonacci technical % retracement levels that are most crucial in Forex market analysis are 38.2% and 62.8%. Most Forex market technicians will track a retracement of a price uptrend from the beginning to its most recent peak. Other important retracement %s are 75%, 50% and 33%. For instance, if a price trend starts at 0, peaks at 100, and thereafter declines to 50, then it would be a 50% retracement. The ratio of 0.0% is considered the start when the Forex market retraces itself while the ratio of 100% marks when the market entirely reverses its direction. These 2 points are referred to as the trough and the peak respectively. Once you identify these 2 points in the trading patterns, then it is time to start identifying possible support and resistance levels. 

Why Use Fibonacci Retracement
The main purpose of using technical analysis in the Forex market is to identify trends and patterns that can be utilized to evaluate the optimal time to buy or sell currency on the market. There are many different strategies that traders employ for technical analysis and Fibonacci Retracements is one of the many strategies that can be used. Fibonacci Retracement is based on the belief that the Forex market will move in one particular direction and at specific points it will retrace its steps before moving forward in its original direction. This strategy attempts to identify these points on time so that you can make a successful trade.

The price of a Forex currency pair does not necessarily move up or down in a straight line. Usually it moves up or down in a zigzag pattern. Fibonacci Retracement Levels comes in handy as the tool that is used to calculate where the zigzag will stop. The Fibonacci levels are 38.2%, 50% and 62.8%, these points form the points at which price is likely to make a pullback. 

Fibonacci Retracements are an effective technical analysis strategy that Forex traders can use to profit from strong trends when trading in the Forex market. The ratios created helps traders to determine when you should enter the market based on a set of numbers that naturally occur in nature. During the trend, the market will retrace by a certain % point and that pullback is essentially at one of the Fibonacci ratios. However, to fully profit from techniques such as Fibonacci retracements you need to understand other aspects of technical analysis as well.