Predicting Market Behavior…Blindfolded! (Part 5)

Predicting Market Behavior…Blindfolded! (Part 5)

Many of you have probably guessed that this was a series of daily bars of the Dow Jones Industrial Index. This last chart shows the action through Friday, February 27, 2009. You can see I marked what I consider to be the probable path of price with a set of thick green lines.

When I speak of the Dow falling to 5500, I can see the fear and shock in people’s eyes. At a recorded interview at the November 2007 Traders Expo, with the Dow right at the 13,000 area, I told Tim Bourquin of MoneyShow.com that my charts showed the Dow would likely break 7,500 within 18 months. Fifteen months later, we are closing just above the psychological 7,000 level on the Dow.

I know what I see in the charts I have presented here. I think it would be best for this country and the world economy for all of our worst fears to be realized quickly. The governments of the world should stop throwing good money after bad and let the Dow and other major indices fall until they find a sustainable level. And then I believe the stock markets around the world would begin a period of range trading, while investors slowly began examining stocks around the world for some signs of stability, and then for stocks that might be undervalued. This purging process is necessary—and once it happens, and once our worst fears are realized, the healing and rebuilding can begin.

My thoughts go out to all of you struggling in these difficult times.

Best,

Timothy Morge

Predicting Market Behavior…Blindfolded! (Part 4)

Predicting Market Behavior…Blindfolded! (Part 4)

Price had no trouble breaking below the blue, up-sloping lower Median Line. In fact, every rally seems to be met with fresh sellers. Thirty bars later, price has broken below the prior major swing low and shows no sign of climbing back above it.

What is the probable path of price? Is price more likely to head higher or lower?

Price accelerates to the down side. This is a very weak market.

What is the probable path of price going forward?

Have you guessed what market I am charting for you yet? Find out in Part 5!

Predicting Market Behavior…Blindfolded! (Part 3)

Predicting Market Behavior…Blindfolded! (Part 3)

Now let’s go back to looking at the charts one at a time.

Price has tested the blue, up-sloping Median Line twice. It has also left triple bottoms that will act as support below where it is currently trading.

Where is price headed? Is the probable path of price higher from here or lower from here?

Price was unable to break above the blue, up-sloping Median Line, and after consolidating, it traded lower.

To make it easier for you to see both the up and down side potential of this market, I added back in the red, down-sloping lines and left the blue, up-sloping lines as well.

Price is testing the blue, up-sloping lower Median Line parallel. You can see by the two tests of the blue, up-sloping Median Line that this line has shown us where price should run out of directional energy. Will price stop now at the blue, up-sloping lower Median Line and turn back higher, or will it break through the blue lower parallel and trade lower?

More in Part 4.

Predicting Market Behavior…Blindfolded! (Part 2)

Predicting Market Behavior…Blindfolded! (Part 2)

Price is trading right in the middle of the current down-sloping trading range. Price has just left a lower high and I have no indication that this pattern of lower highs and lower lows is likely to be broken.

Then, price breaks above a single minor swing high. To ponder the probable path of price, I make a fresh chart and add a blue up sloping Median Line and its Parallel Lines. You can clearly see price has left triple bottoms below where it is currently trading.

It’s important for me to emphasize that this chart covers the same market action as the prior chart, although five bars have now gone by.

If I completely forget the first chart, it is quite easy for me to ignore the series of lower highs and lower lows that are on this chart. By simply replacing the red, down-sloping lines with blue, up-sloping lines and marking the break above a single minor swing high, I have completely changed the psychology of this chart. If I step back and compare the two, the red chart makes me feel bearish and the blue chart makes me feel bullish.

If I show these two charts to 1,000 traders, a good 90% of them will switch from being bearish to bullish when I replace the red, down-sloping lines with the blue, up-sloping lines, especially after pointing out that price just broke above a minor swing high. Why do these minor changes on the same chart alter their opinion? Let me show you these two charts of the same action side by side so you can see that bringing your opinion to any chart can completely change what you draw, feel, and see.

It almost hurts your eyes to try to see the same visual cues on both charts. That’s how powerful the slope and color of the lines can be!

Humans are visual in nature, and we see what we want to see, so it is vitally important to do our analysis with as clean and clear a mind as possible.

More in Part 3.

Predicting Market Behavior…Blindfolded! (Part 1)

Predicting Market Behavior…Blindfolded! (Part 1)

I recently spoke at the New York Traders Expo, and on the flight home, I watched one of those crime lab shows (I think it was called CSI Peoria). You know the shows I mean: the lab people are called in because there are no clues and they find a single skin cell on a gum wrapper. Once they analyze that single cell using their new super computer and its special software, the name of the criminal magically appears and the case is instantly solved. That’s the world we live in, right? High-powered computers running super smart software can make all our decisions simple and flawless. We are surrounded by this message, and pretty soon, we believe it in our hearts and minds.

When I give Webcasts or speak at live seminars, the most commonly asked questions are: What software do I use for charting, and what special indicators do I use to tell me where the market is going? I do my best to answer everyone’s questions. I still do my long-term charts by hand drawing them, and when I use computer charting programs, I use a variety of charting packages because I mentor and write and people like to see my analysis on the charting programs they use themselves.

I don’t use computer-generated indictors to tell me where the market is headed. I never use lagging indicators, and when I use leading indicators (Median Lines, geometric projections, and retracements and simple trend lines), I use them to “frame” price structure. Then I use my mind to sort through the various possibilities, to get a clear, likely path of price. Once I have the likely path of price in my mind, I look to the market to tell me where it is going. The market is always right, so I always trade what it is showing me. Computers, computer-generated indicators, and computer software always tell us what we program them to tell us—so if conditions change or if the premise is incorrect, the computer will give us a meaningless answer. The market is going where it is going, so I spend the majority of my time watching market structure to determine where the market is going.

I want to show you some of my thoughts about a particular market. But to keep your mind open and clear and without opinions, I’m going to show you my work on charts that do not name the instrument, do not give a timeframe, do not give a price scale. In short, I have taken out any of the clues from these charts that would tell you what market you are looking at. If you don’t know these things, maybe it will be much easier for you to see what clues I am looking at and why I think each of the market structures I am looking at are so important. Let’s give it a try, shall we?

This market is clearly in a downtrend. If you look closely at the upper-left portion of the chart, you can see it was in a strong downtrend before it made the current series of lower highs and lower lows.

You can see I have a red, down-sloping Median Line set on this chart, and it’s doing a good job showing me where price should run out of downside directional energy. Price is heading lower, and this leading indicator has marked the probable path of price for me.

More in Part 2.

Timothy Morge

How to “See” the True Message of the Markets (Part 5)

How to “See” the True Message of the Markets (Part 5)

The probable path of price is becoming clearer to me, but perhaps one more chart will bring it into clearer focus for both the trader and for you:

chart

The finishing touches on this analysis are simple. I mentioned before that when I see that the measured length of the swing from pivots A to B equals the length of the swing from pivots C to D, I find the same tools will give me useful projections of the swings forward in time. On this chart, I measured the upside distance price travelled from swing B to swing C, and then projected that same distance upward from the low made at swing D. If I am correct, the swing currently unfolding to the upside from pivot D will be the same length as the swing higher from pivot B to pivot C. Note that I marked where this next swing higher should run out of upside directional energy, at about $880 per ounce.

I don’t see any sign that the current uptrend is over or nearing completion, so if price pulled back a bit to test the up-sloping lower sliding parallel, and that line held, I would be interested in entering a long gold futures position. Remember that this is the pre-trade analysis, so it is too soon to talk about specific entry prices and initial stop loss orders, but as always, I would only enter the orders if the size of the initial stop loss was acceptable and the risk reward ratio was within my normal parameters.

You can see I added a wide green line that unfolds in a wave pattern to show what I consider to be the probable path of price. Once I add the probable path of price onto the chart, it becomes obvious that if I am correct about the projected price target at $880, price will also be running into resistance at the down sloping Schiff Upper Median Line Parallel—and that Upper Parallel marks where price should run out of energy—a great place to take profits.

I showed you charts and analysis that support both a down side move and an up side move. Remember that this analysis is meant as an exercise to help traders objectively identify market structure and then help them determine the probable path of price.

Let’s see what the gold futures did over the next several weeks:

chart

Price came down and tested the lower sliding parallel, and the key support held at that level. Upon successfully testing the sliding parallel, price turned back higher and made a very quick, nearly vertical run up of over $140 an ounce, right to the $880 per ounce area where I projected and marked the equal measured move. Then, after consolidating a bit, price traveled higher and tested the down-sloping Schiff upper Median Line parallel, where it ran out of upside directional energy.

Do not let your opinions get in the way of your trading! Do your best to do objective analysis, and more importantly, trade the market’s actions, not your views or opinions. If you find yourself getting short three times in a row while the market continues to make new highs all morning, you are trading your opinions, not trading the market’s action. The market is always right!

I wish you all good trading.

How to “See” the True Message of the Markets (Part 4)

How to “See” the True Message of the Markets (Part 4)

My first comment to the trader doing his pre-trade analysis, once I presented this chart, was that price may have completed its downside run for now, or in effect, completed its journey. I then noted that in my simple swing analysis, price was still in an uptrend. It may turn lower, but on my first two charts, I see no clues that price will turn lower.

Let’s see more of the detailed analysis I presented to him:

Click to enlarge image


Price has fallen in a near-vertical fashion twice on this chart, and there is a tool that was modified to be particularly useful after near vertical falls: the modified Schiff Median Line. If you study the chart above, you’ll see that it is a derived version of the traditional Median Line, formed by moving the original starting point of the Median Line handle horizontally and vertically halfway towards the pivots that form the Median Line width. The easiest way I have found to illustrate the shift of the first pivot is the construction of a box that begins at the pivot A and continues to the pivot B on the diagonal, and by shifting the origin of the handle to the center of this box, a modified Schiff Median Line is formed.

I take the trader’s original Median Line and make it a Schiff Median Line. I chose this down-sloping Schiff Median Line over a traditional Median Line because it adjusts well to the near vertical falls this market has experienced and will do a better job projecting the probable path of price. By modifying the trader’s own Median Line, I also keep him in tune with my analysis, since I am building on his own analysis.

Now I want to consider both the downside and upside possibilities. I add in a blue, up-sloping Median Line and its parallels. As soon as I add this Median Line set, I note that price has violated the blue lower Median Line early on, but has now moved well above the lower parallel. Looking closer, I see that when price violated the blue, up-sloping lower Median Line parallel, it stopped at the down-sloping lower Median Line parallel, where price should run out of downside directional energy. I add in a line parallel to the up-sloping Median Line that goes through the low for this move at the down-sloping lower parallel. All further downside movement should find that this new up-sloping, sliding parallel line acts as support.

More in Part 5…

How to “See” the True Message of the Markets (Part 3)

How to “See” the True Message of the Markets (Part 3)

Now that I have a general feel for the market structure and the current trend, I move on to more detailed analysis.

chart



click to enlarge image


I add back in the red, down-sloping Median Line and its parallels. By adding in the lines the trader originally used to “see” the market, I have now connected him to his original thoughts and feelings about this market. And, remember that his secondary analysis used geometric ratios as a way to frame his view that this market was experiencing a pullback in a downtrend because price was unable to break above the 61.8% retracement of the swing lower from pivot C to pivot D.

Like all traders, I have my own favorite way to use tools, and geometric ratios are no exception. My favorite use of these mathematical tools is a simple equal measured swing. I simply measure the distance price traveled when it moved down from pivot A to pivot B, then I go to the next major swing high at pivot C and project that same distance. If price moved the same distance starting at pivot C, where would a swing down of equal length end? I find that equal measured swings are often deadly accurate.

Looking at the chart above, you’ll see that the distance price traveled from pivot A to pivot B, when projected from the next major swing high at pivot C, would have given me a probable target for pivot D (well before it even formed) that matched where price ran out of downside directional energy and turned, forming the new pivot. I chose this type of analysis for two reasons: 1) I like using measured swings, and find that they project useful targets for the length of swings; and 2) Because the trader had originally used a Fib ratio to justify his pre-trade view, I used a tool from the same family when doing my own analysis while he watched—connecting him again visually to the work I was doing.

In my general analysis of the markets, I see price unfolding in swings that have a particular frequency or length. And often, these swings can be projected quite accurately if the right tools are used. If I project a measured swing, where the distance from A to B equals the projected distance from C to D, and I see the actual swing travels the distance I projected for swing C to D and then changes direction, I know two things from experience. First, price has probably completed the current swing in that direction, and second, an important high or low has most likely just been made by price because price ended its travel in one direction where it should run out of energy. The swings unfolding in this market will likely continue to unfold in an orderly fashion, and I should be able to project them successfully using these tools.

More in Part 4…

How to "See" the True Message of the Markets (Part 2)

How to "See" the True Message of the Markets (Part 2)


Many traders feel that Fib ratios offer clues about whether a move higher in an established downtrend, for instance, is a pullback in the downtrend, or whether the move higher is a change in trend to the upside. In particular, some traders view the 61.8% Fib ratio as the dividing line. If price has been in a downtrend and manages to rally past the 61.8% Fib ratio, it’s likely that the move higher is a new emerging uptrend, not a rally in an established downtrend. And you can see on the second chart in Part 1 of this article that this trader was pointing to price’s failure to test or break above the 61.8% Fib ratio before turning back lower as a likely sign that the recent up move was merely a countertrend rally.

The new student then added what he considered to be the most probable path of price. After doing his pre-trade analysis, he had decided price was about to resume the downtrend. With this view in hand, he would be looking for price to test the red, down-sloping upper Median Line parallel after a slight rally. Note that he expected the next rally, the one that might test the upper parallel, to be lower than the prior swing high.

When I work on pre-trade analysis with a trader in mentoring, I am examining the trader’s analysis and ability to “read,” or “see” the market structure clearly. In my mind, I am asking, “Can the trader “see” the market structure clearly? Has he considered both the downside and upside scenarios during his pre-trade analysis? Is he projecting a realistic probable path of price? Is he being objective or is he choosing his analysis to support his view on the market?” Often, the only way for me to determine if the analysis is objective is to start from scratch and do my own analysis, in front of the trader. Let’s see what steps I went through with this trader:



The first thing I generally do when analyzing a market is look closely at the market structure. I want to know the major swings, how they formed, and where the market is currently in terms of swing structure.

On the daily gold futures chart above, I removed the red Median Line and its parallels—and that makes it much easier for me to see and mark the major swing highs and lows. Note that I marked higher highs and higher lows in green, indicating price was in an uptrend. I marked lower highs and lower lows in red, indicating price was in a downtrend. And I marked congesting or contracting areas, where price was making higher lows and lower highs, in blue. This simple analysis gives me a feel for the length of swings for this particular market, shows me visually how price generally confirms trend changes in the market, and of course, it shows the current trend of the market.

All other analysis flows from this simple structure analysis. When I do my own pre-trade analysis on a given market, I may or may not have to draw in these swings—my eyes are well trained at this point, and it is easy for me to see market structure. But if it is a market I am not familiar with, or if the structure is not instantly visible to my eyes, I clear off any lines drawn on the chart and do this simple swing analysis—and the market structure instantly becomes recognizable.

More in Part 3…

How to “See” the True Message of the Markets (Part 1)

People “see” things all the time. We see a face on the shadowy pockmarked surface of the moon. We see horses and dragons and fairies when we look at the fluffy clouds in the summer sky, and we see crabs and horses and bulls when we look at the pinpricks of light standing out from the pitch black night sky. The problem with seeing things is that we may be projecting what we want to see instead of what’s really there.

Because I deal mainly with technical analysis of the markets, it is important that I do not project my feelings and opinions onto what I see when doing analysis—though that’s often a difficult task. There is real value in the results of objective technical analysis, but there can be great danger if a trader sees what they want to see in their technical analysis.

When I teach students to be better traders in my mentoring programs, one of the things we work on over and over is keeping objectivity in our analysis. I find this is best accomplished by always using a set of tools that you have mastered and know inside and out. And to keep emotions out of the analysis and trading, I find it’s best to develop a step-by-step approach. You’ve heard of “paint by the numbers?” Well, I try to help each of my students develop their own “trade by the numbers” routine; one that plays to their own strengths and avoids their weaknesses.

By laying out a detailed, step-by-step trade plan in writing before the trade begins, each trader has a market map in front of them, and if their emotions start to creep in, or if they lose their focus, they can easily get back in step with their original trade plan because they have it right in front of them on their desk.
The hardest part of any trading plan is keeping your head free from emotions and opinions until all the pre-trade analysis and planning is finished. Think about it: If you begin with an opinion and you are like most of us, you are much more likely to pay attention to the analysis that supports your pre-trade opinion. But opinion-free analysis is a learned habit, so I often spend a good deal of time with traders that are new to the mentoring process going over their analysis while they are still stalking a trade. Let me show you just what I mean:

chart


Here is a chart of the daily gold futures from one of my newer students. You can see that he added a red, down-sloping Median Line to show what he feels is the most probable path of price. If he is correct, price should run out of upside directional energy at the red, down-sloping upper Median Line parallel—and that would be an area where he might look for a high-probability trade entry set up to enter a short position in the gold futures.
Let’s look at the second chart he presented me as part of his pre-trade analysis:

chart


Before drawing in what he considered the likely path price would take, he took the high at Pivot C and the low at Pivot D and calculated the 61.8% geometric retracement (what many traders call the 61.8% Fibonacci Ratio.)

What actually happened?

Tim Morge, a proponent of median lines, history of development

Tim Morge explains the history of median lines development trading lessons strategies

Five Tips to Help You Start 2009 with a Winning Edge! (Part 5)

Five Tips to Help You Start 2009 with a Winning Edge! (Part 5)

Find the right tune to dance to when trading.

Now what the heck does that mean?

Do you ever feel like the markets are speeding by you, and you are struggling to find patterns and trade entries, but it’s all just going by you too fast? Or, do you find yourself chewing on your fingernails or squeezing a rubber ball because it seems to take forever for that 20-minute bar to close? You might be doing the right dance to the wrong tune!

Traders are people, and each of us has a different ability to read the markets. Some of us are long distance runners, and some of us are sprinters; some of us are rabbits, and some of us are the turtles. If you are a fast-paced trader that craves action, you will not be comfortable trading off of a 60-minute bar chart. Similarly, if you like to ponder and think carefully about each trade, then trading a ten-tick bar chart of the e-mini S&P will make your head spin!

Markets have personalities in the same way that people have personalities. Some markets are hectic and have large trading ranges each day, while others seem to move rather slowly, unfolding their moves over time. To be successful as a trader, you have to find a rhythm for your own trading that isn’t too fast or too slow—otherwise, you will be out of sync! And of course, each market you trade moves at a different speed, so if you trade three different markets, you may find you are watching a five-minute bar chart of one market, a 2000-tick bar chart of another market, and a 20-minute bar chart of a third.

The key is to get in tune with the market and find a time frame or charting frequency that works for that particular market and is also pleasing to you as a trader. Like the three bears, you don’t want to trade in market conditions too fast or too slow. Instead, you want to find charting frequencies that are “just right” for both you and a given market.

These are five important ways you can improve your trading this year. None of them are flashy—instead, they are simple, common sense ways to approach trading that can make a great difference at the end of each month. Building your own trading methodology is like building a foundation for a house in that you use solid blocks that fit together well. Flashy materials don’t last over time. Use time-tested methods that you have researched and that you know work. Once you have found a methodology that is profitable, don’t give in to the urge to move on to something more complex or flashy. Always remember that the goal for every trader should be to make money consistently. If you have found a set of tools that you are able to make money with, spend time mastering those tools instead of exchanging them for the hot new indicator. Trading is hard work, but if you can master a trading methodology, it can be extremely satisfying—as well as profitable!

I wish you a wonderful and prosperous 2009!

Best,

Timothy Morge

Five Tips to Help You Start 2009 with a Winning Edge! (Part 4)

Five Tips to Help You Start 2009 with a Winning Edge! (Part 4)

Again, more is often less! I am constantly amazed at the barrage of inflated claims that the average trader has to wade through in their E-mail inbox and the trading magazines they read. For example, I recently received an E-mail inviting me to come listen to a "trading expert" who was going to show me how to catch "all the tops and bottoms." In the same week, I got another invitation to hear another expert explain how he turned $120 dollars into $126,000 in six weeks! And my favorite advertisement from one of the trading magazines features an expert that claims he averages 1,286% a quarter, and "You can, too!" Is it any wonder that the average trader uses too much leverage?

I have the same philosophy that a good friend of mine has when it comes to making money trading: The best way to make a good deal of money trading is to make smaller profits on a regular basis. All the small profits added together will build a huge pile of profits over time. Both he and I are considered large speculators in the markets we trade. I call this type of trading "making donuts" and he calls it "slicing sausage." I don't believe in trading for the home run. If one finds me, I'll take it, but the real money is made by consistently making profitable trades.

Every trader hears the stories of the guy on the exchange floor that made a killing because he pyramided his position over and over. As a young trader, one of my mentors was a gentleman that had "cornered" the copper market several times in his trading career. But one thing is certain about these traders that hold out for the home run profits every time they trade: They don't last very long. At the exchanges, you get to see guys that picked the top or bottom in a given market and rode it for a great ride. And you also get to see them lose all their trading capital the next year, because picking tops and bottoms is not a long-term winning proposition. And worse, using too much leverage always leads to ruin, whether it is by slowly bleeding your account to death or by one savage losing blow to your account.

Don't pay attention to claims that sound too good to be true. Trading is hard work. When you get very good at it, it is often repetitious. Once you find a methodology that works, you hone and master it, and then you use the same trade entry set ups over and over. The profits generated from these repetitive trades go on your profit pile. At the end of the month, you get to be pleasantly surprised when you add them all up.

But if you have one weak moment and put all your capital on one trade because you are convinced it is the "perfect" set up, chances are that all that hard work and all your capital will be gone. And you won't be able to trade any longer-the worst penalty that anyone who loves the markets could be sentenced to. Don't use too much leverage. Instead, rely on steady profits to build your account.

More in Part 5 of 5.

Timothy Morge

Five Tips to Help You Start 2009 with a Winning Edge! (Part 3)

Five Tips to Help You Start 2009 with a Winning Edge! (Part 3)

More is often less! One of the most common problems I see in traders when they first start one of my mentoring programs is that they try to watch too many markets. Many times, these traders are struggling to get in the black on a regular basis, and yet, they’ll be trying to learn a new trading methodology while watching fifteen or twenty markets. Unless you are a longer-term position trader, you don’t have the ability to watch twenty markets in real time and give each market the attention it needs. It’s hard enough to learn to juggle three balls with your feet firmly on the ground, but imagine trying to juggle twelve balls at a time while riding a bicycle!

I think that the majority of traders would be well served to find four to six markets that are liquid and have a nice daily range. Rather than overextend their focus, they can then closely monitor the handful of markets they have chosen for trade set ups they know they are capable of trading successfully. Once they have mastered the tools they use to trade, and have developed their eyes to spot repeatable trade entry set ups, four to six markets will present more than enough trading opportunities.

Most traders focus on their winning trades, but all of us must realize that when we lose money, we have to make that money back before we are net profitable. This sounds like something everyone knows, but believe me, many traders just don’t think that way. If I had a dollar for every time a trader told me about their “big trade of the day,” but admitted that they net lost money on the day when pressed, I wouldn’t need to work another day. People remember what they want to remember—and that means they conveniently forget what they don’t like to think about. By looking at too many markets, you may find more trades, but at the end of the day, or at the end of the month, you may be taking less money out of the market. The quality of your trades is much more important than the quantity of your trades.

More in Part 4 of 5.

Timothy Morge

Five Tips to Help You Start 2009 with a Winning Edge! (Part 2)

Five Tips to Help You Start 2009 with a Winning Edge! (Part 2)

Always plan your trade before placing your orders. Many traders like to trade “free form,” with no plan. These traders feel they have freedom to react to whatever the market throws their way. But there are two very important reasons why trading with a plan is a better idea: 1) Trading can be hectic, and 2) Trading can be emotional.

If you have an open position and don’t have a trading plan in place, when the market becomes overly volatile, you are left trying to make snap decisions. We have all recently experienced markets that were so volatile that it was difficult to tell where price was currently trading. Trying to make informed decisions and then execute them when the markets are volatile is a losing proposition. This often leads to excess slippage, or a failure to get filled on your orders because the market is moving so fast. And trying to type in orders while the market is moving extremely fast often results in errors. It is too hard to make money trading to give it away to execution errors.

When an open position begins to turn into a losing position, your feelings generally begin to cloud your judgment. Traders start to hope that they can hold onto their positions until the market turns back in their favor. If they have had a few losing trades in a row, some traders go as far as rubbing their favorite lucky amulet or praying to the trading Gods—and I am sure some would make a pact with the devil if they could get through to him! Let’s face it: When your emotions begin to cloud your mind, you don’t make the best decisions.

How can you best deal with hectic markets and the possibility of emotions clouding your judgment? Plan your trades before you take them. Write the trading plan out in detail. You’ll have a step-by-step guide for each trade sitting in front of you. Then simply execute the plan, step by step. By having a plan, you have the security of having the road map right in front of you. If emotions start to creep in and make you nervous, you simply look at the step-by-step plan and execute as you planned it. One of my students calls it “trading by the numbers.” This same plan will protect you if the markets suddenly get overly volatile. You’ll have your stop loss orders in place when you first enter the position, and then it becomes an exercise of following the step-by-step decisions you made before you entered the trade, when the volatility was normal. You won’t be forced to make snap judgments in a hectic market because you have the road map right in front of you.

A bad trade plan is better than no plan at all. With no plan, you are often forced to make snap judgments in volatile markets or when your focus is clouded by your emotions. I tell my students that their focus is at its best when they are first stalking a trade. As the stalking continues, and as the trade opens and unfolds, you spend more and more of your energy and ability to focus. Soon you are trading with half your original energy and focus, and that means you will be making decisions with half your original resources.

And don’t underestimate the value of having well thought out records of your trade entry ideas. If you keep detailed trade plans and records, you will truly be able to treat your trading as the business it is. Furthermore, at the end of each month, you should go over the statistics of your trading. By analyzing your trading results on a month-by-month basis, you’ll be able to see patterns emerge that will help you pinpoint your strengths and weaknesses as a trader. Once you learn to identify your strengths and weaknesses, you will be able to work on improving your performance in areas where you struggle as a trader. And you can play to your strengths by purposely choosing trading and money management styles that work well with your best attributes as a trader.

Every trader in my mentoring programs uses a trade sheet for every trade they take. At first, many find it cumbersome to write out their plan before entering a trade. But once they get into the habit, they begin to reap the benefits of having a detailed road map in front of them as a trade unfolds. And they also benefit from being able to analyze their trades on a monthly basis—which allows them to play to their strengths and work on improving their weaknesses. Begin using a trading plan before you enter your trades and you’ll soon see how much help a road map can be.

More in Part 3…

Timothy Morge

Five Tips to Help You Start 2009 with a Winning Edge! (Part 1)

Five Tips to Help You Start 2009 with a Winning Edge! (Part 1)

The holidays are over and a new year is upon us. We're all rested, recharged, and eager to start trading. Some traders had a profitable trading year in 2008, while some traders had a rough ride. The NFA tells us that 90% of all people who open a retail brokerage account close their account after losing all the money in that account-and the average account is closed before twelve months has gone by! If 2008 gave you a rough trading ride, you may be wondering how to improve your trading this year, and even if you had a profitable trading year in 2008, there are always things to work on to improve your bottom line performance. I thought I'd start out this year with an article that highlights the most common problems I see when teaching traders how to be better traders, either in my group mentoring program or in my one-on-one mentoring program.

1. Always use stop loss orders! I don't actually see this problem in either of my mentoring groups, because I do extensive screening before accepting anyone for either program-and I refuse to work with anyone that does not use stops anytime they have a market position. But I am constantly amazed by the number of traders, experienced and inexperienced, that don't use physical stop orders (versus mental stop orders or no stop loss orders at all.)

   While managing professional traders at a large institutional trading desk in the 1980's and 1990's, I watched some of my best traders literally destroy their careers when they failed to use stop loss orders. They were relying on mental orders, and froze when their positions turned against them. And at the exchanges, a week doesn't go by that someone tells me about an acquaintance that went "tap" because they failed to use stop loss orders. And saddest of all, a young trader that signed up for one of my seminars last year E-mailed me a week before the online event to tell me that they would not be attending because they got caught long in a plunging E-Mini S&P market and lost all the money in their trading account-because they failed to use a stop loss order as protection.

   Stops are your friend! They protect you when things go wrong-and keep you in the game! The number one thing I feel every trader must do, this year and every year, is use stop loss orders for protection. I know many traders feel that as soon as they enter a stop loss order, the "players" will find their stop loss orders. And they'll be stopped out of their position just before price makes the large move they were looking for.

   With a little knowledge about the price structures that appear regularly in the market, it's easy to find logical areas to place your stop loss orders. These areas act as buffers that stop or slow price's advance or decline before it reaches your stop loss order-unless you have totally misread the market. And if you have misread the market, your stop will be hit, but that will be a good thing, saving you untold amounts of money. If you use stop loss orders intelligently, they can give you protection you must have and still give your positions enough room to mature.

   Please use stop loss orders every time you take a position. The markets are always right and none of us can afford to fight the market. If you get stopped out of your position, take a break and refocus. Once your thoughts are clear, look at the charts with a clear and open mind for new trade entry set ups.

To be continue in Part 2 of 5.

Timothy Morge