M6 - Man, Mind, Money, Markets, Method & Madness

[amitrandive]

My 3 Biggest Trading Screw Ups and How I Overcame Them

http://eminimind.com/my-3-biggest-trading-screw-ups-and-how-i-overcame-them/

Screw Up #1: Exiting too Soon

Solution: Calculate your expectancy

Exiting a trade too soon is usually a result of fear of giving back profits. Take the time to run the numbers and gather some trade data and run an expectancy calculation and R-Multiple.

Accept the loss before you place the trade – Before I place a trade I envision what it would feel like to take a full stop out. This keeps me in check as I make sure I’m comfortable with my loss limits.

Walk away from screen – Sometimes the best thing to do is to walk away. If you have profit targets set and a stop loss in place getting up from the computer and letting the trade begin to work can help prevent micromanaging of the trade.

Keep positions small – As I said before exiting too soon is usually a factor of trading with fear. I’d rather trade small and consistent, than large and have wild fluctuations in P/L because you can’t follow your trade plan.

Screw Up #2: Giving it All Back

Solution: Utilize trail stops

Having a trade go your way, almost reaching your profit target only to reverse and stop you out is a terrible feeling. It was at this point in my trading that I adopted the use of a trail stop in conjunction with my profit targets to help lock in profits on the way up, at the same time giving the trade room to work.

It’s better to pick away at the market (in my opinion) hitting singles and doubles, than holding out for the home run.

Other Helpful Techniques: Giving back profits can also be a result of a series of losing trades. It’s important to not just limit your loss per trade, but also set a daily loss as well. I limit myself to 2 losing day trades on the day. At that point, I stop trading for the day.

Getting back to expectancy, running the numbers can also help you tweak your trading strategy such that one loser doesn’t offset a half dozen winners.

Screw Up #3: You Start Trading a New Strategy Just as the Market Changes

Solution: Pick one thing and stick with it

When I talk with struggling traders, or meet with them one on one it often results in identifying the trading strategy, indicators, or principles that resonate with them and developing them further.

I found that when I focused on the style of trading that resonated with me the most I was able to better clarify my ideas and become a master of my craft. Just as a business owner knows the ins and outs of their business, you need to know the ins and outs of your strategy and bouncing around from strategy to strategy only prolongs this achievement.

Other Helpful Techniques: Become a master of one strategy. Get it down to a science before incorporating other markets or time frames. At this point, a trader’s intuition begins to take effect and things will start to “click”.

 

[DSM]

Lessons From The Palindrome - Some excerpts

http://www.mercenarytrader.com/2014/02/lessons-from-the-palindrome/

In the now-dying trading pits of Chicago and New York, hedge fund titan George Soros was once known as “the Palindrome” (his name is the same backwards or forwards). In addition to running billions – at a time when the hedge fund industry was far smaller – Soros was known for moving markets on the strength of his opinion. If Soros’ Quantum Fund was moving size, other funds would follow.

So when floor traders found themselves awash in great waves of buying or selling – with Soros rumored as the source – they would cry out: “The Palindrome! The Palindrome!” The Palindrome did more than rack up stunning returns (better than 30% compounded over decades).

More importantly, he shared powerful ideas and insights that transformed economics and trading at the margins.

Some quotes and explanations :

Basically, thinking is the most important aspect of my existence. I’m quite contemplative. I like to understand. The desire to truly understand what is happening is central to success. Many market participants don’t actually want to understand. They just want to achieve a result.

Lack of understanding, or apathy in regard to understanding, presents a form of “black box” risk: If something goes wrong, and you don’t actually understand the situational mechanics at work, you won’t know how to diagnose the problem – and are far less likely to have even seen it coming.

As Bertrand Russell once observed, “Most people would rather die than think: Many do.” Substitute “lose money” in place of “die” and that is undeniably true.

I used to do a lot of philosophical speculation as a young man. I discovered that one can learn a great deal more through action than through contemplation. So I became an active thinker where my thinking played an important role in deciding what actions to take and my actions play an important role in improving my thinking. This two-way interaction between thinking and action became the hallmark of my philosophy and the hallmark of my life.
The natural extension of thinking and contemplation is action. Indeed, the whole point of thinking is to facilitate a logical action – especially when it comes to markets. Again, there are vast seas of market participants, and “armchair theorists,” who do not get this basic point.

On the one hand you have those who would try and profit in markets by thinking as little as possible; on the other hand you have those who would expend copious amounts of time and energy contemplating utterly useless things, meanwhile “acting” far too infrequently (or worse yet not at all).Action keeps you sharp and on point. Without it, your thoughts grow frivolous and soft. If you never act on your ideas, you risk going off the reservation in terms of both conceptual validity and practical pragmatic use. Someone who routinely tests and vets their ideas with actual market participation will have far greater clarity as to what is relevant and what is not; what is useful and what is not; what is worth further investigation and what is not.

I contend that taking fallibility as the starting point makes my conceptual framework more realistic.
Fallibilism (from medieval Latin fallibilis, “liable to err”) is the philosophical principle that human beings could be wrong about their beliefs, expectations, or their understanding of the world… in the most commonly used sense of the term, this consists in being open to new evidence that would disprove some previously held position or belief, and in the recognition that “any claim justified today may need to be revised or withdrawn in light of new evidence, new arguments, and new experiences.” This position is taken for granted in the natural sciences.

In layman’s English, adopting fallibilism as a core philosophy amounts to the following:
• recognizing you could be wrong at any given time;
• being truly open to this possibility, not just superficially;
• upholding objectivity as one of the highest virtues;
• emphasizing the search for truth above ego;
• contemplating the flaws in your own worldview;
• cultivating a cheerful willingness to change your mind.

Most people claim to be objective, in touch with reality, and driven by the search for truth. Most people are also full of it. The doctrine of fallibilism, as a life philosophy and core belief system, has so many deep implications one hardly knows where to begin. Soros has done a great service simply by underscoring the value of fallibilism, not just by talking it but walking it successfully (to the tune of tens of billions).


I am good at riding the tide, but not the ripples of a swimming pool.
Soros was (and is) very aware of the distinction between trending markets and trendless markets – emphasizing his need for the first.


The Palindrome makes billions by taking the following steps:

• formulating a thesis before taking a position
• investing time and energy in thesis confirmation
• exploiting the trend once said thesis is confirmed.
This process does not work with swimming pool ripples – the movements are not large enough.
There is a time and energy investment in uncovering the trend rationale.

One then needs a “tide” movement of reasonable size to fully exploit the trend (or false trend) once discovered.

When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.
From a market practitioner standpoint, the “false trend” and the “Soros test” are absolutely invaluable.

Investors who understand these concepts not only have a great and lasting money-making advantage over those who do not, they have a risk management advantage too, in terms of greater odds of keeping the profits they have made. A “false trend” is in place if the rationale for the trend itself is flawed. This can happen in the beginning – when a trend is built on flawed perceptions from the outset – or it can happen somewhere in the middle, when a “true” or logically justified trend becomes “false” as feedback loop dynamics take over and market participants collectively part with rationality as a result of inertia, greed, delusion and so on. If you really understand false trends, you further understand that you do not always avoid them; sometimes you ride the hell out of them, in pursuit of truly massive profits.

Soros, the grand old man of money-making with style, is happy to ride a false trend (of sufficient size) as long as he can “find the flaw in the investment thesis.” That is to say, if he understands the drivers of the trend, he can participate as long as it is safe to do so… and then dismount before the false trend reverses.


The “Soros test,” meanwhile – a phrase of our own making – is a super-powerful idea on all three fronts: fundamentals, sentiment, and price action.

The Soros test can further be quite revealing in respect to the underlying fundamentals of a trend. Displays of resilience and strength, in hindsight, are often traced back to hidden variables or factors one did not anticipate or expect. The seasoned market practitioner thus learns to go hunting for such unknowns when a test is passed. Price action and sentiment, of course, are the main means of observing a Soros test and confirming a pass / fail grade in the first place.

It takes courage to be a pig… as far as Soros is concerned, when you’re right on something you can’t own enough.
The above quote is from Stan Druckenmiller, not Soros (though obviously referring to him).

In addition to being deeply comfortable with his own fallibility – and thus possessing no fear of changing his mind – Soros is legendary for knowing when to bet huge. This knack is a function of all the other methodology traits: The contemplative focus on really understanding what is happening. The two-way interaction between thinking and acting (and empirically confirming). Thesis development for “tide” sized trends (as opposed to swimming pool ripples). A cheerful commitment to fallibilism (no ego-driven rigidities or fear of being wrong).It is further valuable to note that “courage to be a pig” is one big thing Soros and that other grand old man of markets, Warren Buffett, have in common. Buffett showed no fear of making absolutely massive bets at various points in his journey, committing as much as 40% of his total funds to a single idea. American Express, Coca-Cola and the Washington Post are three examples of these (all scooped up at heavy crisis discounts).

 

[DSM]

Breakout from Master Candle

Learnings :

* Wait for the breakout candle to close
* Add a comfortable factor above/below the breakout candle for entry.

Source : http://www.forex4noobs.com/forex-blog/analysis/60-pips-on-master-candle-break/

 

[amitrandive]

Breakout from Master Candle

Learnings :

* Wait for the breakout candle to close
* Add a comfortable factor above/below the breakout candle for entry.

Source : http://www.forex4noobs.com/forex-blog/analysis/60-pips-on-master-candle-break/

DSM

Any guide as to which is a master candle and how to identify it in real time ?

 

[XRAY27]

@Amit

This is the details of Master candle

 

[DSM]

Amit, Master Candle is also known as 'Mother Candle' a term you might be more familiar. Here's an full article with explaining how to trade it :

Inside Bar Forex Trading Entry

http://www.learntotradethemarket.com/forex-trading-strategies/inside-bar-forex-strateg

Inside bars are one of my favorite price action setups to trade with; they are a high-probability trading strategy that provides traders with a good risk reward ratio since they typically require smaller stop losses than other setups. I like to trade inside bars on the daily chart time frame and ideally in strong trending markets, as I have found over the years that inside bars are best in trending markets as breakout plays in the direction of the trend. However, they can indeed also be used as reversal signals from key chart levels, we will discuss both in this tutorial. Let’s discuss some facts about inside bars first and then I will go over some examples of how I like to trade them.

What is an inside bar?
An inside bar is a bar (or a series of bars) that is completely contained within the range of the preceding bar, also known as the “mother bar”. The inside bar should have a higher low and lower high than the mother bar (some traders use a more lenient definition of inside bars to include equal bars). On a smaller time frame such as a 1 hour chart, a daily chart inside bar will sometimes look like a triangle pattern.

Important note: Since the inside bar setup is by its very nature a potential breakout signal, I ONLY enter an inside bar on a breakout of the mother bar high or low. If I am looking to buy, I will place a buy on stop entry just above the mother bar high, and if I am looking to sell I will place a sell on stop entry just below the mother bar low.

There are different variations, but the way I determine an inside bar setup is if the inside bar is contained within the range of the mother bar from high to low. That is to say, I use the mother bar high and low to define the range that the inside bar can be contained within, others might use only the real body of the mother candle as the determining range, but I do not trade it that way.

In the example image below, we can see the anatomy of an inside bar setup. Note that the inside bar is fully contained within the range of the high and low of the mother bar. You can have multiple inside bars within the range of one mother bar. If you see a pattern of consecutive inside bars that are “coiling” and all within the previous bar’s range, this can signal that a powerful breakout might be coming, more on this later.

What does an inside bar mean?
The inside bar trading strategy is a ‘flashing light’, a major signal to the trader that reversal or continuation is about to occur.

An inside bar indicates a time of indecision or consolidation. Inside bars typically occur as a market consolidates after making a large directional move, they can also occur at turning points in a market and at key decision points like major support/resistance levels.

They often provide a low-risk place to enter a trade or a logical exit point. In the image you will see next, we see an example of inside bars that formed as a continuation signals and then one that formed as a turning point signal. While they can be used in both scenarios, inside bars as continuation signals are more reliable and easier for beginning traders to learn. Turning-point, or inside bar reversal signals, are best to leave alone until you have some solid experience under your belt as a price action trader.

How to trade the inside bar setup
There are basically two ways to trade an inside bar setup: As a continuation signal or as a reversal signal.

The chart image below has a variety of inside bars for us to pick apart…

First, you will see that we have inside bars that acted as continuation signals, that is they resulted in a continuation of the previous momentum before their formation. These continuation inside bars often result in nice breakouts in-line with the current trend and near-term momentum.

We can also see a good example of an inside bar that acted as a reversal or turning point signal. Note on the far right side of the chart an inside bar formed at a key support level, the market then broke back the other direction and made a nice move higher from the inside bar / stalling pattern that formed at a previous level of key support.

Important note: There are basically two different stop loss placements for inside bar setups, and you will have to use some discretion in determining the best one for each inside bar you trade.

The “classic” and most commonly used stop loss placement will be just above or below the mother bar high or low, depending on if you are trading long or short of course. I typically go with 1 pip above or below the mother bar high or low…no need to try and figure out the “best” distance above or below the mother bar…the trade either works or it doesn’t, a few pips won’t make that big a difference over the long-run.

The next stop placement is typically used on inside bars with larger mother bars. Although a larger mother bar on an inside bar setup is not really what I like to see, you can sometimes trade inside bars with larger mother bars, and if you do, you will probably want to place your stop loss near the mother bar 50% level, that is the ‘halfway point’ between the high and low of the mother bar, as that is really the only way to get a decent risk reward ratio on these types of inside bar setups.

I prefer smaller and “tighter” inside bars that don’t have really large mother bars…this shows more ‘compression’ and thus a stronger potential breakout from that compression. If you are a beginner or struggling trader, I suggest you avoid inside bars with big mother bars for now, see the previous example chart above for an example of an inside bar with a big mother bar.

Inside bars as continuation signals

The most logical time to use an inside bar is when a strong trend is in progress or the market has clearly been moving in one direction and then decides to pause for a short time.

Inside bars can be used when trading a trend on the 4 hour charts or the daily charts, but I personally prefer to trade inside bars on the daily charts and I recommend all beginning traders stick to the daily charts and until they have fully mastered and found consistent success with the inside bar setup on that time frame. I also recommend sticking to inside bars that are in-line with the daily chart trend as continuation signals until you have fully mastered trading them that way.

In the chart example below, we can see a few examples of inside bar setups on the daily EURUSD chart that worked out quite nicely. They were in-line with the near-term dominant daily chart trend and resulted in nice breakout continuation plays…

Inside bars as reversal signals

You can sometimes trade inside bars as reversal signals from key chart levels. Please note that this should ONLY be tried after you have successfully mastered trading inside bars in-line with the daily chart trend as continuation / breakout plays, as we discussed above.

In the chart below, we can see an example of a good inside bar reversal signal. Of critical importance here, is that the inside bar formed at a key chart level, indicating the market was hesitating and “unsure” if it wanted to move any higher. We can see a decent downside move occurred as price broke down past the inside bar’s mother bar low..

http://cdn.learntotradethemarket.com/wp-content/uploads/inside-bars-as-reversal-signals.png
The best time frame for trading inside bars

I really only trade inside bars on the daily chart time frame. There’s good reason for this, and that reason is mainly because on time frames under the daily chart, inside bars simply grow too numerous to be worth trading. There can be long strings of inside bars on a 4 hour or 1 hour chart before a breakout for example, and trying to trade them will most likely cause you a lot of frustration due to all the false breaks that can occur on those chart time frames.

I get a lot of emails about inside bars, and many traders try in vain to trade them on lower time frame charts, and it really is just a huge waste of time. Once you gain experience, you MIGHT be able to trade inside bars on a 4 hour chart time frame, but that is the LOWEST time frame I would ever consider trading an inside bar on. The daily chart is the best for inside bars, and even the weekly chart can sometimes yield some very lucrative inside bar setups.

Inside bars can be used when trading a trend on the 240 minute charts or the daily forex charts, but I personally prefer to trade inside bars on the daily charts and I recommend all beginning traders should stick to the daily charts until they have fully mastered and found consistent success with the inside bar setup on that time frame.

In the chart example below, note how well the inside bars highlighted worked out. They won’t all work out obviously, but inside bars on the daily chart have a much higher probability of bringing you a profit than an inside bar on a lower time frame…

http://cdn.learntotradethemarket.com/wp-content/uploads/inside-bars-on-daily-chart.png

The chart example below shows a recent 1 hour chart of the EURJPY. If you look closely you will see A LOT of inside bars that failed, this is a prime example of why I avoid trading inside bars on the 1 hour chart and also why I LOVE to trade them on the daily chart time frame…

Finally, here is a video of a past live trade using the Inside Bar Strategy:

https://www.youtube.com/watch?v=QDAo_q1DuFI

DSM

Any guide as to which is a master candle and how to identify it in real time ?

 

[DSM]

Some good examples of tradable bars (in direction of trend) As they are high probability plays and with good RR.
(Also my understanding why these bars?

Markets always cannot go up without retracement/profit booking.
Shaking off weak hands off the trend before moving on.
Confuse/misguide most AFL

source : http://forexiation.blogspot.in/2012/05/quality-inside-bar-backtest-extended.html

 

[Somatung]

Just for fun, as charting makes fun at least to me. I love the subject in what ever way and always try to keep it as simple as possible. Thanks dear DSM about the above post. :thumb:

 

[DSM]

Thanks Dear Somatung. You are most welcome. I think simplicity = clarity, more indicators = confusion. Was looking up on Master/Mothercandle, found another chart, which somebody has analysed - as pertaining to Fx. The Master/Mothercandle, Pinbar and simple Dow Theory of HHHL and LLLH makes a good combination, in my view.

Source:https://www.dukascopy.com/fxcomm/fx-article-contest/?Don-T-Miss-A-Mother&action=read&id=913

Just for fun, as charting makes fun at least to me. I love the subject in what ever way and always try to keep it as simple as possible. Thanks dear DSM about the above post. :thumb:

 

[DSM]

Four Multi-Millionaire Traders Share Their Thoughts On Trading

http://www.ino.com/blog/2009/02/fou...share-their-thoughts-on-trading/#.U0Fd8PQW00I

“The key is consistency and discipline,” says Richard Dennis who grew $400 into $200,000,000.
"The key is consistency and discipline. I don't think anybody winds up making money in this business because they started out lucky." For legendary trader Richard Dennis, the importance of being consistent isn't just theory. In 1984, on a bet, Dennis trained 23 individuals off the street to religiously follow a set of trading rules. His point was to provide that discipline was the key to trading success. All but 3 of those beginner traders made over 100% return their very first year of trading and Dennis won his $1,000,000 bet. Consistent discipline is also what is taught in the "Futures in Motion" advisory service.

“It's perseverance” declares Tom Baldwin who started with $25,000 and made untold millions trading upwards of $2 billion dollars a day in T-Bond futures.
"It's perseverance. You don't need any education at all to do it … because it is like any job. If you stand there long enough, you have to pick it up." By most accounts, Tom Baldwin may be the single largest individual trader in the T-Bond pit and Tom attributes his success to perseverance. This is a principle on which "Futures in Motion" is based. According to Tom, you need no special education to become a super trader. Ken agrees and believes that if you just follow him every day, eventually you have to pick it up. "It is a happy circumstance that when nature gives us true burning desires, she also gives us the means to satisfy them. Those who want to win and lack skill can get someone with skill to help them."

“Always use stops” recommends Michael Marcus who turned $30,000 into $80,000,000.
"Always use stops. I mean actually put them in, because that commits you to get out at a certain point … to be a competent trader and make money is a skill you can learn."

“Get someone with skill to help” advises Ed Seykota who turned $5,000 into $15,000,000 trading commodities.
Ed Seykota lives on Lake Tahoe and trades from his office overlooking a view of incredible beauty. Ed's living his life exactly as he wants and the gentle philosopher within him wishes you to enjoy the same privilege. To Ed, it's a simple matter; if you have a true burning desire, get someone with skill to help you.