Traders Roundtable: the eight “P’s” of trading success

At a recent weekend traders roundtable discussion, the topic of the keys to trading success came up.

Experienced traders with different styles and different favorite markets and techniques identified what they thought were their best pieces of advice for novice traders.

It was late in the day and adult beverages may have been served and so our creativity was perhaps in full force.

What finally emerged from our freewheeling discussion was the idea of the 8 “P’s” of trading success.

After we discussed each of these concepts, ourinsight was that your trading results were probably shaped by the concept you were least effective with. At least, that is our working idea. Here are the eight keys that we identified:

1. persistence: there have been a lot of studies that suggest the most important component of success is grit. You’ve heard the saying that showing up is 90% of the battle. Trading is so complex and uncertain that persistence is crucial. It’s the willpower to keep going in the face of obstacles.
2. preparation: there’s no substitute for having a detailed trading plan to help guide you through complexity.
3. participation: you can’t make money  in the market by being on the sidelines.
4. practice: repetition breeds muscle memory and for traders, mental memory.
5. performance: trading is a bottom-line business and at the end of the day, month, year you have to to make money.
6. perception: this ranges from how you perceive the market, how you perceive a system working, and how you perceive yourself.
7. position sizing: this ensures that you stay in the game even when you get the direction wrong. Position sizing allows you to achieve your financial objectives.
8. preservation: you have to take care of yourself, your family, your capital, your sanity, your sense of humor, and your profound sense of self.

In future essays we will go deeper into each concept, but the short discussion will get you started.

Traders roundtable: how does position sizing compare to diversification as a risk management tool?

In a recent traders roundtable discussion, our talk came around to a discussion of two different risk management tools: position sizing and portfolio diversification. The question became: which one of these strategies is more effective?

The discussion led us to quickly reframe that question into one which said “how do both of these strategies, and others, allow us to develop a comprehensive risk management protocol for our trading strategies? First, a couple of definitions are in order.

Position sizing can be defined as a way to determine how many shares of your target to trade given your risk appetite, the size of your portfolio, your trade management skills, the market conditions, the normal and abnormal characteristics of the instrument your trading, the time of day, your mood at the moment of the trade, the robustness of your hardware and software systems and so on.

All of these factors taken together allowing you to establish an initial stop which will allow you to take a businessman is risk with your initial entry as expressed by dollars per share of initial risk. If you have done the calculus correctly, your average loss on losing trades should never exceed the amount you calculated your initial risk. If you discover that your average loss is greater than your initial risk over a statistically significant number trades, then there is some variable inside that list that you are improperly estimating and you are trading at too high a level of risk and therefore too large a position size for your trader quality number.

Portfolio diversification can be considered as the number of independent positions or piles of money that you will allocate into individual trades as a percentage of the total portfolio. Conventionally, we think of diversification as a poor man’s risk management by spreading the risk around we can expect to receive the average market return because things will tend to balance out. The greater the number of opportunities, the greater the likelihood that you will receive the average rate of return of the given system.

Taken together then we can think of position sizing as a tactical application of risk management to an individual trade that consider strategic variables when making specific decisions.

We can then think of portfolio diversification as a way to spread individual trade risk across a broad system in order to standardize our returns. This is more of an operational or strategic level policy decision whereas position sizing is a tactical application of risk management.

Our traders roundtable concluded that both of these working together should be more effective than either taken separately.

Blending them is sensible because they can be mutually supportive and effective trading strategies risk management process.

Profitable ETF Trading Strategies: trade like Ted Williams hit baseballs

There is general agreement that Ted Williams was the greatest hitter in the entire history of baseball.

He brought a science to the practice of hitting, a committment to  the informed  practice of his craft, a deep understanding of his strengths and weaknesses as a hitter. These combined with his natural physical ability to produce a hitter whose like will probably not be seen again.

I want to focus on his approach to hitting and his keen insights to his craft which I think directly apply to our craft of trading.

Williams studied every at bat and every swing, and developed a matrix of his personal strike zone which showed what his average was in every region. His strike zone measured 7 baseballs wide by 11 baseballs tall.  Knowling his average for each of these areas helped him abide by his first rule of hitting:  swing at good pitches. If you chase bad pitches then that’s what you will get from professional pitchers.

He advised that you also had to do your homework:  preparation gets your mind right. I equate this to our preparation phase of trading, which includes knowing the market classification, the patterns that are working, the oversold or overbought condition in the short term, amd the specific volatility statistics of the market and our preferred targets.

Williams’ final piece of top level advice was to be quick with the bat. Being quick in action means you can wait a bit longer to commit, you will be fooled less, and you will be  more confident in your execution. We can apply this advice by streamlining our decision making process by rehearing, by reducing our required information to the minimum needed to act, and by anticipating  events in order to have a plan of action worked out ahead of time.

It’s remarkable how similar the keys to high performance really are between different fields of human effort.

Profitable ETF Trading Strategies: the best book on trading

A friend of mine who is seeking to develop his skills as an equity trader asked what book on trading he should read if there were only one.

I started to think about the different masterpieces I have read and have applied in my own trading.  There are masterpieces of fundamental analysis, of technical analysis, of trading technique, and investing strategy out there. It was a daunting task to settle on just one.

When it finally hit me, though, everything fell into place. There is one book that is so powerful that it stands out head and shoulders above all others to such an extent that it is not even close.

It’s a book that has a direct effect on the trader no matter what style, time frame or technique is being applied.  It works for men and women, for any kind of trader in any kind of market.

Its’ a book that bears reading and re-reading and will always allow for new insights and nuances.

It’s a book that adapts to you and your emerging style.

It gets better the more you use it.

It’s not cheap but it IS free.

It will reward you based on the amount of time you put into it. It will perfectly mirror your needs of the moment and help you find your strengths and weaknesses.

You can buy it in any store that sells office supplies, and while there is only one edition, it can fill many volumes.

It tells many stories, and the plot will often change before your eyes. It will take you to places you never imagined, although there is a thread of familiarity that ties everything together.

In short, it contains everything you will need to be successful as a trader if you put the time and effort into it.

Naturally, I am speaking of your trading journal, an intensely personal unique approach to how to trade the markets.

I’d suggest that the time and effort you put into refining the craft of journaling and reflection will be directly proportional to your continued success as a trader.

So, if there’s only one book for you to read and study as a trader, that’s the one.

Profitable ETF Trading Strategies: an extended reflection on risk management and mental toughness

A Trader Quality Number  idea: if i want to trade AA today, and in the sideways mkt i have been using .1 iStop, maybe today i can use .4 as the iStop for position sizing, and acknowledge i will exit at -.5R or an adverse move of .2

if you are timid about pushing the button then you Risk level is too high. So, make a bold correction on your risk level by cutting it by a factor of 4

can u trade 1 share of the target without worry? can you trade 2 shares?

there is some threshold where you believe you can trade it, but that if you got any larger, it would begin to be an issue.

we set that threshold using our most optimistic mind.

i say start with 1/4 of what you “think” you can safely trade.

i say that because we know that our fear is 3x larger than our greed in terms of importance.

so if i want to “win” 1000 on my 2:1 venture, i have to risk 500.  then i ask myself: can i risk 500 and manage the trade? my optimistic mind says “sure”

so i actually risk 500 and i notice i am on pins and needles. why?

because my optimistic brain imagined i could handle 500 =R, when my stomach says “not so fast, thats 500!”

so i say , fark it, if you think you can handle 500 no problem, cut it in 1/4 and risk 125

and round that to 100 for math

if you feel you have to be successful then you are importing that stress to every trade, unless you make the trade so small that you can set aside the stress

i am giving you a technique to make it obvious to yourself that you can set aside the stress

you improve your stress management by desensitizing those excitement nodes in your brain

if you think you can handle 500 =R, then i say make R =100 and do it 30 times with no stress, then over the course of 2 weeks

you will have enough data points to see if you can trade that risk level routinely.

i dont mean tweak the risk level a little, i mean make a bold correction.

my plan for a day like today would be to buy breakouts of targets that are stronger than SPY.

I dont need pullbacks on days when the market is melting up.

lets look at HD today: i would normally engineer a .1 stop, but it looks like a “slow grow and dont look back day”.

fark it, its going up, everything is going up, buy it with 1 bullet at 1/4 of the position size

I will do the bold correction, since I am changing methods. ie a .4 iStop, instead of .1

$250 bullet (ie 1R), thats 2500 shares with .1 initial stop (iStop), or 600 @.4iStop (conservative rounding error)

if it moves .2 in my favor (ie .5R) go to “no lose”, and there is all the trade improvement i need to be content in that trade.

my worst case contingency? what’s the worst thing that can happen?

right after i buy it it starts failing, and i say fark it, exit after an immediate -.2R adverse move, for a -.5R loss; there is my “.25R per trade improvement”

if your risk voice is interfering with TQN (your trader quality number), then by definition you are trading at too high a risk level and your gut knows it.

its your gut that dominates anyway.  your gut is your lizard brain

the lizard brain is “fight or flight” and is the oldest part of the evolutionary brain, the closest to direct sensory organs

the next brain is the emotional mammal brain that tries to improve its environment to allow for contentment and safety out into the future

it needs comfort and love

it is challenged by the fear feelings generated from the lizard brain

on top of all that is the so-called rational brain of the “economic man” which thinks it is in charge

be serious. the rational brain is the last one to the party and has least  influence over our behaviors under conditions of stress

that’s the brain that works in the ivory tower of the best of all possible worlds

it is  out of touch with reality, yet that’s the brain we ask to calculate “the maximum ‘reasonable’ risk i should be able to manage on my best day with no distraction”

that brain calculates “$500″ and we try to live up to that benchmark even though our mammal brain says “If I fail, i won’t be loved and i am jeopardizing the tribe” while the lizard brain is always looking for things to run away from

because he knows he can afford to be hungry a little longer, but if he gets caught, its the end

So the key is to desensitize the lizard then, with 30 trades of 1/4 of the rational risk, and this also means we never risk becoming “unloved”.

the lizard brain is activated when it sees what might be a threat inside its field of vision and sees how it can go wrong; it bases that on physical size

it interprets size as threat

we interpret “dollars at risk” as a threat the same way lizards view “size” as the threat

we say we can engineer a stop of .1 but we are seized with the image of a .4 adverse move in a sudden shock and interpret that, properly, as a potential -4R loss

so don’t figure out your R based on the best possible contingency case, ie an orderly set of losses that degrade a penny at at time in a smooth step function which lets you easily exit

ask the lizard what he’s really afraid of, his worst fear, and say “well, at least we know what our R really is”

based on cognitive science which puts fear at 3x more powerful than greed, you can be more psychologically balanced by estimating that your initial “best case” comfort level of R is at least 3x too large in reality, which is why i would say cut your R by 4 or 5

to make a bold correction

if your first estimate is that you can handle R = 100, i’d say, well start at 25 then , ie dinner for 2 in kansas, and demonstrate proficiency at that risk level first then build up

now this will establish whether or not it was risk level causing you grief; you can eliminate that as the issue

you might find its a deep seated need to be right: in order to please a parent? to validate the little kid who was osatracized as a youth? the shy new kid who needs acceptance? to have the respect of those you respect? to help the teen boy trying to be a man?

we get all sorts of “help” like this from the emotional mammal brain

to feel like you are a man who can provide for his family? we get a lot of standards to meet, which are connected to our emotional center, provided by our emotional connections to family and from society

all of these things stand between us and a state of mind which is pure, of “just trading”

that’s the zero state, defined in a new way; prepared to “just trade”, then trade. a pure zen moment

our organic brain has been conditioned by the 10 million years of the era of evolutionary adaptation to behave in certain ways based on chemical reactions, that are optimized for something quite removed from “just trading”

and filling out some checklists once, and doing an exercise now and then in the comfort of a seminar classroom is only tenuously connected to the act of trading everyday

those are preconditions, and potentially fast tracks to improved performance

but the truth comes from entering the ring everyday

and having the persistence to prepare properly every day

and then do it, rain or shine

the difference comes from the willingness to endure the pain, and to be able to keep going back into it, that’s what separates Lance Armstrong for example

you think he doesnt feel the pain like other guys? he does, he just is willing to endure it

the great ones hate the pain of practice, but they persist

our emotional brains do not operate as straight line functions

try this exercise  suggested by Robert:

If you really want to see how much stress you can handle, plan out a trade tonight and a position size to risk 10x the normal risk….$5000 lets say.

Now widen your stops and lower the size

Maybe the trade is 2000 shares( we can all buy 2000 right) with a 5 point stop. R=10k. See how it feels, see how you react that position. Now if you want to move out of your comfort zone, put on the trade.

Now sit with that 10K position for an hour or a day or a week.

this morning i observed KO breakthrough 50, and said that was massively important, psychologically. in the meantime it has moved to 50.54

i think it has every potentual for being better than SPY for the next 2 weeks because there is no resistance

it made a 6 month new hi; there is no resistance in sight

it stays on my watch list

i will buy it with tactical momentum each and everyday until otherwise noted

but acknowledging my lizard and mammal brain issues

relentless attention to the lizard and rat brain

listen to the guy in the ivory tower, but remember he isnt getting his ass kicked potentially on every trade

acknowledge he can see things from his height, but  remember that life is lived on the ground

Robert reminded us of “The man in the ring”  when he said:

Good thoughts KL…nothing take the place of the man of action. That’s been my experience in every part of life.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Robert also reminds us of the challenge to play to our potential when he said:

“I also tell anybody to play small as KL suggested. But there comes a moment where you have to see if its “possible” to play up to your potential. Play from tips, take on the big boys so you know what if feels like.

When you put on a big position for the first time wide stops, we have the time to comtemplate the responsiblity of trading the counter part of the freedome of trading

Tips”= On a golf course, if you play every hole from the back of the championship tees its the hardest setup for that course. (Never done in tournaments even)

It take a mental toll on your game b/c the course, any course becomes much more intimidating and the designers true intentions become apparent.”

Now get out there and trade.

Lombardi said: everyone wants to win, but not everyone will do the things it takes to prepare to win.

Trader Quality Number  idea: if i want to trade AA today, and in the sideways mkt i have been using .1 iStop, maybe today i can use .4 as the iStop for position sizing, and acknowledge i will exit at -.5R or an adverse move of .2

if you are timid about pushing the button then your Risk level is too high.

So, make a bold correction on your risk level by cutting it by a factor of 4

can u trade 1 share of the target without worry? can you trade 2 shares?

there is some threshold where you believe you can trade it, but that if you got any larger, it would begin to be an issue.

we set that threshold using our most optimistic mind.

i say start with 1/4 of what you “think” you can safely trade.

i say that because we know that our fear is 3x larger than our greed in terms of importance.

so if i want to “win” 1000 on my 2:1 venture, i have to risk 500.  then i ask myself: can i risk 500 and manage the trade?

my optimistic mind says “sure”

so i actually risk 500 and i notice i am on pins and needles. why?

because my optimistic brain imagined i could handle 500 =R, when my stomach says “not so fast, thats 500!”

so i say , fark it, if you think you can handle 500 no problem, cut it in 1/4 and risk 125

and round that to 100 for math

if you feel you have to be successful then you are importing that stress to every trade, unless you make the trade so small that you can set aside the stress

i am giving you a technique to make it obvious to yourself that you can set aside the stress

you improve your stress management by desensitizing those excitement nodes in your brain

if you think you can handle 500 =R, then i say make R =100 and do it 30 times with no stress, then over the course of 2 weeks you will have enough data points to see if you can trade that risk level routinely.

i dont mean tweak the risk level a little, i mean make a bold correction.

my plan for a day like today would be to buy breakouts of targets that are stronger than SPY.

I dont need pullbacks on days when the market is melting up.

lets look at HD today: i would normally engineer a .1 stop, but it looks like a “slow grow and dont look back day”.

fark it, its going up, everything is going up, buy it with 1 bullet at 1/4 of the position size

I will do the bold correction, since I am changing methods. ie a .4 iStop, instead of .1

$250 bullet (ie 1R), thats 2500 shares with .1 initial stop (iStop), or 600 @.4iStop (conservative rounding error)

if it moves .2 in my favor (ie .5R) go to “no lose”, and there is all the trade improvement i need to be content in that trade.

my worst case contingency? what’s the worst thing that can happen?

right after i buy it it starts failing, and i say fark it, exit after an immediate -.2R adverse move, for a -.5R loss; there is my “.25R per trade improvement”

if your risk voice is interfering with TQN (your trader quality number), then by definition you are trading at too high a risk level and your gut knows it.

its your gut that dominates anyway.  your gut is your lizard brain

the lizard brain is “fight or flight” and is the oldest part of the evolutionary brain, the closest to direct sensory organs

the next brain is the emotional mammal brain that tries to improve its environment to allow for contentment and safety out into the future

it needs comfort and love

it is challenged by the fear feelings generated from the lizard brain

on top of all that is the so-called rational brain of the “economic man” which thinks it is in charge

be serious.

the rational brain is the last one to the party and has least  influence over our behaviors under conditions of stress

that’s the brain that works in the ivory tower of the best of all possible worlds

it is  out of touch with reality, yet that’s the brain we ask to calculate “the maximum ‘reasonable’ risk i should be able to manage on my best day with no distraction”

that brain calculates “$500″ and we try to live up to that benchmark even though our mammal brain says “If I fail, i won’t be loved and i am jeopardizing the tribe” while the lizard brain is always looking for things to run away from

because he knows he can afford to be hungry a little longer, but if he gets caught, its the end

So the key is to desensitize the lizard then, with 30 trades of 1/4 of the rational risk, and this also means we never risk becoming “unloved”.

the lizard brain is activated when it sees what might be a threat inside its field of vision and sees how it can go wrong; it bases that on physical size

it interprets size as threat

we interpret “dollars at risk” as a threat the same way lizards view “size” as the threat

we say we can engineer a stop of .1 but we are seized with the image of a .4 adverse move in a sudden shock and interpret that, properly, as a potential -4R loss

so don’t figure out your R based on the best possible contingency case, ie an orderly set of losses that degrade a penny at at time in a smooth step function which lets you easily exit

ask the lizard what he’s really afraid of, his worst fear, and say “well, at least we know what our R really is”

based on cognitive science which puts fear at 3x more powerful than greed, you can be more psychologically balanced by estimating that your initial “best case” comfort level of R is at least 3x too large in reality, which is why i would say cut your R by 4 or 5

to make a bold correction

if your first estimate is that you can handle R = 100, i’d say, well start at 25 then , ie dinner for 2 in kansas, and demonstrate proficiency at that risk level first then build up

now this will establish whether or not it was risk level causing you grief; you can eliminate that as the issue

you might find its a deep seated need to be right: in order to please a parent? to validate the little kid who was ostracized as a youth? the shy new kid who needs acceptance? to have the respect of those you respect? to help the teen boy trying to be a man? to feel like you are a man who can provide for his family?

we get all sorts of “help” like this from the emotional mammal brain

we get a lot of standards to meet, which are connected to our emotional center, provided by our emotional connections to family and from society

all of these things stand between us and a state of mind which is pure, of “just trading”

that’s the zero state, defined in a new way; prepared to “just trade”, then trade. a pure zen moment

our organic brain has been conditioned by the 10 million years of the era of evolutionary adaptation to behave in certain ways based on chemical reactions, that are optimized for something quite removed from “just trading”

and filling out some checklists once, and doing an exercise now and then in the comfort of a seminar classroom is only tenuously connected to the act of trading everyday

those are preconditions, and potentially fast tracks to improved performance

but the truth comes from entering the ring everyday

and having the persistence to prepare properly every day

and then do it, rain or shine

the difference comes from the willingness to endure the pain, and to be able to keep going back

into it, that’s what separates Lance Armstrong for example

you think he doesnt feel the pain like other guys?

he does, he just is willing to endure it

the great ones hate the pain of practice, but they persist

our emotional brains do not operate as straight line functions

try this exercise  suggested by Robert:

If you really want to see how much stress you can handle, plan out a trade tonight and a position size to risk 10x the normal risk….$5000 lets say.

Now widen your stops and lower the size

Maybe the trade is 2000 shares( we can all buy 2000 right) with a 5 point stop. R=10k. See how it feels, see how you react that position. Now if you want to move out of your comfort zone, put on the trade.

Now sit with that 10K position for an hour or a day or a week.

this morning i observed KO breakthrough 50, and said that was massively important, psychologically.

in the meantime it has moved to 50.54

i think it has every potential for being better than SPY for the next 2 weeks because there is no resistance

it made a 6 month new hi; there is no resistance in sight

it stays on my watch list

i will buy it with tactical momentum each and everyday until otherwise noted

but acknowledging my lizard and mammal brain issues

relentless attention to the lizard and rat brain

listen to the guy in the ivory tower, but remember he isnt getting his ass kicked potentially on every trade

acknowledge he can see things from his height, but  remember that life is lived on the ground

Robert reminded us of “The man in the ring”  when he said:

Good thoughts KL…nothing take the place of the man of action. That’s been my experience in every part of life.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Robert also reminds us of the challenge to play to our potential when he said:

“I also tell anybody to play small as KL suggested. But there comes a moment where you have to see if its “possible” to play up to your potential. Play from tips, take on the big boys so you know what if feels like.

When you put on a big position for the first time wide stops, we have the time to comtemplate the responsibility of trading the counter part of the freedome of trading

Tips”= On a golf course, if you play every hole from the back of the championship tees its the hardest setup for that course. (Never done in tournaments even)

It take a mental toll on your game b/c the course, any course becomes much more intimidating and the designers true intentions become apparent.”

Now get out there and trade.

Lombardi said: everyone wants to win, but not everyone will do the things it takes to prepare to win.

Profitable ETF Trading Strategies: the power of stories

Trade like a storyteller

We know from cognitive science and learning theory that humans are storytellers by both nature and nurture. Knowing this about how our brains are wired can help us in a couple interesting ways as lifelong  traders and learners.

Generally it is easier for most people to learn when the new information is presented in the form of a story. Therefore, when you are looking for new information about how to trade effectively, you would be well served to attend to the stories the treacher tells, and check to see if the story resonates with you.

If you can’t “get” the story, it will make it very difficult if not impossible to make sense out of the details.

If you “get” the story though, you have a storyline that acts as an organizing structure or “schema” for you to atatch the new data to.

The best stories for learning are real, short, interesting and human. That makes it easy to see how the new information can apply to you. For teachers, this means that you will improve your practice by adding short, sharp, engaging stories of real people in similar situations to where your students will be heading in the future.

Your stories will be even more powerful when they touch the emotions and provide an incentive to acheive a favorable emotional state. That’s why most of thepowerful selling techniques tell a story about a very desireable emotional state that can be achieved if only the customer will exchange money for the magic bullet.

As traders, you might consider trying to develop the “story” of a stock or an Exchange Traded Fund. By proposing a “storyline” that the target “could” follow, you can then identify price points wherre the storyline is violated and you can exit quickly because the target is following a different path or script.

There are extraordinary  possibilities for improving your trading and learning performance by appreciating the powers of stories. Can’t you just imagine it!?

We know from cognitive science and learning theory that humans are storytellers by both nature and nurture. Knowing this about how our brains are wired can help us in a couple interesting ways as lifelong traders and learners.

Generally it is easier for most people to learn when the new information is presented in the form of a story. Therefore, when you are looking for new information about how to trade effectively, you would be well served to attend to the stories the teacher tells, and check to see if the story resonates with you.

If you can’t “get” the story, it will make it very difficult if not impossible to make sense out of the details.

If you “get” the story though, you have a storyline that acts as an organizing structure or “schema” for you to attach the new data to.

The best stories for learning are real, short, interesting and human. That makes it easy to see how the new information can apply to you. For teachers, this means that you will improve your practice by adding short, sharp, engaging stories of real people in similar situations to where your students will be heading in the future.

Your stories will be even more powerful when they touch the emotions and provide an incentive to achieve a favorable emotional state. That’s why most of the powerful selling techniques tell a story about a very desirable emotional state that can be achieved if only the customer will exchange money for the magic bullet.

As traders, you might consider trying to develop the “story” of a stock or an Exchange Traded Fund. By proposing a “storyline” that the target “could” follow, you can then identify price points where the storyline is violated and you can exit quickly because the target is following a different path or script.

There are extraordinary possibilities for improving your trading and learning performance by appreciating the powers of stories. Can’t you just imagine it!?

Profitable ETF Trading Strategies: adapting to a changing market

The market goes through changes all the time, as market participants and their methods and objectives change through time.  Sometimes trend following will dominate, sometime reversion to the mean trading will be effective, other times channel trading with strict profit targets will work.

It is normal for traders to develop preferred methods of training, based on our experiences and our preferences, and our style of trading and our chosen markets. It is normal to have periods of time when your preferred methods are especially effective, and other times when it is heavy sledding.

As market conditions and patterns change it is normal to see a change in how effective our chosen methods perform. Since market conditions change in unpredictable patterns and over changing periods of time, it is never easy to formulate rules that govern how to navigate these transitional states.

If you are looking to be a full time trader, you can expect to have to routinely sense and adapt to changing market conditions on a regular basis. It is worthwhile then to develop a mind set that expects this kind of routine change, and a system to routinely manage the transitions.

Here are some things you can do to help you stay in tune with a dynamic market

1. Reduce the frequency of your trading so that you only trade patterns that strictly meet all of your preferred criteria.

2. Trade at reduced risk levels  and reduced size until a new pattern of performance emerges.

3. Monitor the moving average of your trade results to be alerted to reduced performance quality which can signal a change in market conditions sooner than is evidenced in individual technical indicators.

4. Have a variety of systems and strategies that are known to outperform in certain market conditions, so that your action plan adapts to a changing market.

5. Use adaptive risk measures that fine tune your system so that your system parameters remain routinely aligned with market conditions.  Having trailing stops that are a function of Average True Range (an adaptive market indicator) is an example of this kind of adaptation.

Profitable ETF Trading Strategies: paying attention to market pivot points

To extend the metaphor of “Trading is like Driving” a little further, you could think of the market’s pivot points to be like lanes on the highway.

When you are driving on the Interstate or even just in town, the lane markers have come to take on an important meaning ion the minds of every driver ion the road.  This meaning is something created out of the minds of drivers everywhere and acted upon as if they are true, not because of any intrinsic meaning inherent ion the lines themselves.

Behavior of drivers changes as they approach lane markers, not because the strips of paint have any physical ability to affect the motion of the car or truck, but because the mental model of driving is so firmly ingrained in the minds of all drivers.  The lines act as if they constrain the movement of traffic within their boundaries.

An observer from Mars might wonder what magic powers these lines of paint have, but the magic is in the mind.

In the same way, pivot points affect trader decisions on a daily basis in the trade of  the broad market (and by this I mean the S&P 500 and its ETF, symbol SPY).

Pivot points, briefly, are support and resistance levels calculated by traders in the futures pits who use these as reference points to judge the theme of the day and make decisions about how to buy and sell the  ebb and flow of prices throughout the day.

As price approached these pivot points. Price tends to converge and go into a congestion zone of backing and filling. Breakouts from these pivot points can be volatile and fast and can offer the best reward to risk ratios of any trades during the day.

Because large cap stocks and ETFs that track broad market regions and sector trade with a such a high degree of correlation with the broad market, it is a definite edge to the agile trader who can monitor the relationship of his preferred target of the moment to the broader market movement during the day.

When there is high correlation, you will be able to see whether your target or the market itself seems to be making the first move. Once you identify the leader, you can trade the follower more safely, since the leader, where you have no money at risk will give you a heads up on likely moves in your preferred target in the near future.

Many times this early warning can be a couple minutes or as few as a couple seconds. In any case that is enough edge for you to dramatically improve your bottom line in the conduct of the daily trade.

Bottom line; pay attention to pivot points if you are trading large caps and broad ETFs.

Profitable ETF Trading Strategies: trading large cap stocks and broad ETFs

There are a lot of reasons to trade large cap stocks and the exchange Traded Funds (ETFs) that track the broad sectors and regions of the world. It’s not without its tradeoffs, but for a lot of new traders it can make a lot of sense.

You will have to give up the goal of catching the next Google or Microsoft as a small cap which, against all odds, rockets to the very top of the market food chain.

The trade off is worth it for some people because of the following kinds of advantages that you get by focusing on the largest companies in the world and the broadest regions.

The advantages include:

1. Very narrow bid-ask spreads. This is the difference between what buyers are offering as their best buy price  and what sellers are offering as their best sale price. By minimizing the slippage between the bid and the ask,  you will not be penalized as much as you might be on a thinly traded stock or ETF where the bid-ask spread can easily be 10 to 20 times wider.

2. Liquidity: because of the enormous size of their market capitalizations, it is very hard for these companies to go bankrupt overnight. It can happen of course, but remember that the fall from grace of GM and Enron played out over many months, giving agile traders many opportunities to either protect them from harm or to profit from their fall.

3. Analyst coverage: because of the sheer size of the companies and the institutional interest in them, you can be sure that large cap companies have plenty of analysts covering their every move. You can debate on the merits and quality of analyst coverage, but if that is where you perceive your edge, then large cap companies have many analysts to choose from.

4. Institutional money must buy large caps in order to get fully invested and meet the fiduciary requirements of their stated investment strategies.  Some of these institutions are so large that they simply must focus their buying and holding on large capitalization stocks, and so you can be sure that there is always a buyer in size out there somewhere to act as a cushion of safety for you.

5. Orderly behavior: because of the sheer numbers of interested buyers and sellers, large caps tend to trade in an orderly manner throughout the day and because they trade in tandem with the broader market to a large extent, you can effectively monitor positions with less concern over intraday volatility catching you by surprise.

There are as many styles of trading as there are traders.  Trading large cap stocks and broad ETFs though is certainly a way that should attract many new traders looking to begin mastering the craft.

Profitable ETF Trading Strategies: Trade like a defensive driver

I was giving my teenage daughter some advice about how to survive on the road. As a newly licensed driver, she was naturally apprehensive, because this is a brave, new world for her.

As I heard myself giving her guidance from 35 years of successful driving experience, I was struck by how similar it was to what I try to share with people who are beginning their journey as traders.

Here are some common points to consider, as you look to incorporate perspectives that have served you well as a driver into the equally exciting, dangerous and yet rewarding world of trading

1. Half of the other drivers are below average. Some of them are also drunk, crazy, stupid, preoccupied, unstable, distracted and some are about to suffer a heart attack.  Never project your own state of mind onto the person taking the other side of the trade. Just assume they are capable of doing the most extreme and surprising behavior at any time.

2. Disaster is waiting just around the corner, and if you are prepared, alert and ready, and your equipment is serviceable, you just may have an opportunity to make a difference if you keep your wits about you.

3. When you are driving, drive. Be in the present. Pay attention to what’s happening and also to what else might be happening.

4. Don’t drive when you are disturbed, crazy, drunk, sleepy, unfocused, angry, or otherwise occupied. Know when you should not be behind the wheel. If there is any doubt in your mind, don’t drive, don’t trade.

5. Keep your equipment inspected, serviceable and complete with redundant safety measures.

6. Know and respect the rules of the road, and the market.

7. Don’t chase, don’t race, don’t drive like it is there for you to have fun, although there is a certain enjoyment and satisfaction available when you drive well and everything is fine. Just don’t forget your purpose is to get to your destination in one piece and unharmed, and without having caused harm through negligence or inattention.

8. Always have an out. Know where your safe spot is whenever you are driving; Which direction will you go if something happens NOW and you must make an instant decision.

9. There are times when the road and weather conditions are more important than your purpose in driving right now. Know and respect your limits, you can go there tomorrow.

10. Know where you are going and why, and the different ways you can get there. Monitor road conditions along the way and give yourself room for surprises and detours. Don’t drive until you are on the edge of empty. Take breaks and keep your reserves topped off.

11. Always buckle up, because there’s one coming that you won’t be able to see despite your best efforts.

12. Old traders didn’t get to be old by being dumb.