"Remember leverage is a knife of 2 sides, if you can win you will lose." All too true... Thanks for the post.
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7 years at FF - some humble advice
- #62
- Jul 13, 2011 7:40pm Jul 13, 2011 7:40pm
Sorry for my long silence. I am too busy trading to post. More than usual caution it is needed. For sure this market it is not good for novices and new traders.
Don't try to pick up top or bottoms!!
Would like to share d this great piece of analysis from Sean Lee (forexlive):
Time for cool heads to prevail
Written by Sean Lee
July 13, 2011 at 23:10 GMT
It looks like we are entering a time of extreme volatility where there will be plentiful trading opportunities but also lots of danger around every corner
* It’s going to be very risky to be long USD whilst the threat of a ratings downgrade hangs over the US. The impact on the Treasury market cannot be underestimated so USD bulls (or bottom pickers like myself) need to be very careful
* It’s also going to be very risky to be long EUR. The Italian debt situation is a very serious one indeed as their debt levels are quite astronomical for an economy which has grown at around 1.5% on average for the last 10 years. This could be the straw which knocks over the EU house of cards (if you’ll pardon the appalling mixed metaphors)
* Look at the NZD, look at the CHF, look at Gold; all screaming at us that the market is desperate for something ‘safe’ to buy
Conclusion: Be careful. I think we are going to see the unexpected and the Black Swan hasn’t even shown up yet!!
.................
Pepe
Don't try to pick up top or bottoms!!
Would like to share d this great piece of analysis from Sean Lee (forexlive):
Time for cool heads to prevail
Written by Sean Lee
July 13, 2011 at 23:10 GMT
It looks like we are entering a time of extreme volatility where there will be plentiful trading opportunities but also lots of danger around every corner
* It’s going to be very risky to be long USD whilst the threat of a ratings downgrade hangs over the US. The impact on the Treasury market cannot be underestimated so USD bulls (or bottom pickers like myself) need to be very careful
* It’s also going to be very risky to be long EUR. The Italian debt situation is a very serious one indeed as their debt levels are quite astronomical for an economy which has grown at around 1.5% on average for the last 10 years. This could be the straw which knocks over the EU house of cards (if you’ll pardon the appalling mixed metaphors)
* Look at the NZD, look at the CHF, look at Gold; all screaming at us that the market is desperate for something ‘safe’ to buy
Conclusion: Be careful. I think we are going to see the unexpected and the Black Swan hasn’t even shown up yet!!
.................
Pepe
- #63
- Jul 15, 2011 12:29pm Jul 15, 2011 12:29pm
If you try to trade these times from a TA point only, without a deep understanding on what is moving the charts... in the best case you are trading blind. IMHO.
Why Europe Is Really Freaked Out Over A Greek Default
Jul. 15 2011 - 9:20 am | 1,147 views | 0 recommendations | 0 comments
Posted by Adrian Ash
European Central Bank chief Jean-Claude Triche...
European Central Bank chief Jean-Claude Trichet
“The constraints imposed by market forces [on government deficits inside a single-currency union] might either be too slow and weak, or too sudden and disruptive.”
- The Delors Committee report on European monetary union, getting it exactly right in 1989
GREEK BONDS have lost one-half to three-quarters of their face value. Six national strikes have all ended in violence already this year. In the three months to April, public investment spending fell 42% from the start of 2010, but total spending still rose – and tax revenues sank – forcing the budget deficit still wider as the economy shrank 5.5% year-on-year.
What to do? Greece’s debt cannot be serviced, much less repaid. Everything says default – stop paying, write it down or write it off, with or without the lenders’ consent. Default is certain, and history says it would be better for creditors if the restructuring came before Greece misses a payment.
Uruguay’s “pre-emptive” restructuring of 2003, for instance, cost its creditors 8% of their money, according to an IMF study. Argentina’s “post-default” restructuring of 2005, in contrast, cost the affected bondholders some 75% of their original investment.
Yet incredibly, most everyone outside Greece – everyone who thinks they have a vested interest, at least – wants restructuring delayed and delayed again. Why? Because of the banks, stupid.
Only just rescued by taxpayers in 2007-2010, no one knows how badly the banking system will fare when a Greek (or Irish, Portuguese, Spanish or Italian) default strikes. Not through capital loss on the bonds; that’s likely to be a drop in the bucket.
Nor is the loss of Greek bonds as collateral – securities against which banks can borrow – the big issue either. In that market, “Greek state bonds have already been marked down by close to half their face value,” says John Dizard at the FT, and besides, the European Central Bank is holding most of those. (So you can imagine the ECB’s position on writing them off to zero.) In the private market, the “haircut” on credit extended against Irish and Portuguese bonds by LCH.Clearnet, a leading clearing house, has already gone to “75% and 65% respectively” says Tamara Burnell, head of sovereign research at London’s M&G Credit Analysis team.
No, instead, it’s the money owed to holders of credit default swaps – derivative contracts insuring against failed debt repayment – that risk taking the world straight back to September 2008. One estimate puts the insurance cover at 25% of Greece’s outstanding debt. Another private estimate reaching us here at BullionVault puts the gross CDS insurance cover at twice Greece’s €340 billion of outstanding debt.
Either way, the sheer scale of those claims would explain why the European Parliament is racing to make “profiteering” from a sovereign Euro default illegal. (So-called “naked CDS”, where the claimant doesn’t hold the bonds, but is betting that a default is coming, have become a big issue for Euro politicians, as we’ll see below.) It also explains why “The United States was concerned about a default on debt by Irish banks,” as Dublin’s former finance minister Brian Lenihan revealed in April.
“He said the U.S. was concerned about credit default swap contracts being triggered,” reported The Irish Times, “although he did not say why.”
Anyway, back in the Greek crisis, “European banks are long about 17% of the €340 billion of total Greek sovereign debt outstanding,” reckons Niels Jensen at Absolute Return Partners. “A 65% haircut [ie, write-off] would result in losses of €37-38 billion, not enough to create anything remotely looking like systemic risk.” Shared across Western Europe’s banking sector, in fact, the bond loss itself would be nothing compared to the IMF’s estimate of $1.4 billion lost in the region during the financial crisis of 2007-2010.
Even in credit default swaps – those contracts which “allow a buyer of credit protection to pay [an interest-rate] spread to the credit protection seller, in return for a settlement in case the [original debtor] incurs a credit event,” as a handy cut-out-and-keep guide from 2005 put it – a Greek default would see “the overall net pay-out [of] only $5 billion,” reports the Financial Times.
Because Bank A’s pay-out would enable Bank B to meet its Greek insurance promise to Bank C, who in turn could then settle with Bank A. That net end-result would take some reaching, however, and the $5bn estimate – merely reflecting US bank exposure, it seems – “may not truly reflect the size of potential losses for some banks,” the FT goes on. “The gross CDS exposure on Greece is $79bn and some analysts speculate that any one bank may have to pay out as much as $25bn.”
Note that word “may.” Because “there is no way of finding out about these [CDS] exposures,” as analysts at BNP Paribas reminded everyone in Jan. 2010. Credit-default swaps were long traded ‘over the counter’, buyer-to-seller direct, with no central exchange or clearing-house recording every transaction for posterity.
The U.S. authorities have been racing to get CDS at least cleared through a recognized “central clearing party,” somewhere they can monitor the liabilities, if not prevent the clearer going down amid a disorderly run of claims. But in the Bank for International Settlements’ data – source of all the big figures above – some 6% of the global total for OTC derivatives comes from “estimated positions” based on a survey from four years ago. More telling still, that 6% outweighs the reported total of CDS, but “excludes [unreported] CDS for all countries except for the U.S.”
Now, on those same data from the Bank for International Settlements, gross Greek CDS cover equals 3% of the total government-debt insurance market worldwide – a signficant chunk compared with Athens’ share of total government debt in issue, now sitting at 0.9% by our maths today. So either Greece looks disproportionately shakey to bondholders (you don’t say), or it’s been over-insured by its bondholders, or it’s been insured by people who don’t yet own any Greek bonds, but who want to cash in when it defaults. Or all three at once.
When U.S. auto parts maker Delphi filed for Chapter 11 bankruptcy in 2005, for instance, “the volume of CDS outstanding was estimated at $28 billion against $5.2 billion of bonds and loans,” according to derivatives expert Satyajit Das. And just as your insurance company might take possession of your wrecked car when it pays out – or it might demand receipts as proof of purchase on a household claim – so a big slug of those CDS on Delphi “require[d] the insured party to turn the underlying bonds over to the insurer when the payment [was] received,” explained J.P.Morgan’s Eric Rosen at a Wharton conference.
But not all CDS demanded delivery of the underlying bond, says Das. Which brings us to politics.
“Credit-default swaps, where you insure your neighbor’s house just to destroy it and make money from it, that’s exactly what we have to curb,” said German chancellor Angela Merkel back in March 2010. “We must prevent speculative actions from causing so much uncertainty on the market that prices no longer provide accurate information and state financing reaches a fundamentally unjustifiable high level,” she wrote – together with the political leaders of France, Greece and Luxembourg, also in March 2010 – urging an EU enquiry into “a well-founded suspicion that speculative practices are having a considerable impact on the development of [government bond] yields.”
At the time, most financial journalists and commentators outside the Eurozone found this laughable. But in Spain, daily paper El Pais (among others) claimed that hedge funds and the Anglo-Saxon media were working together to push up CDS prices, thus driving down bonds (who’d buy a bond costing a fortune to insure?) and forcing Eurozone governments to pay ever-higher financing costs.
Yes, seriously. It even said the Spanish secret police were investigating, and pointed to the Financial Times and Economist as sources of reckless comment.
Amid this frenzy, Merkel and Sarkozy asked the EU Commission to “also consider introducing minimum holding periods for CDS trading, banning speculative CDS trading, as well as banning the acquisition of CDS which are not being used for hedging purposes.” A wish which has now very nearly been granted – but only at the snail’s pace of Euro politics.
“Of course the ban on naked CDS will not solve the fiscal problems of Greece or Ireland. Nevertheless, when you face such a situation, you can choose to add fuel to the fire or put water on it. These instruments should not be used as a speculative tool anymore.”
So said French Green Party MEP Pascal Canfin in February, after filing a report on CDS in January. Putting his proposals before the EU Parliament took until last week, however, and even then “the plenary vote was only used to collect significant majorities which should strengthen the hand of MEP negotiators in their ongoing talks with Member States,” as Strasbourg’s press release says. The discussion “decided the Parliament’s stance”; it did not ban naked CDS, and the enforcement date entered isn’t until 1 July 2012. For now, “OTC derivatives trading is not subject to any legislation other than that between the contracting parties,” as German MEP Werner Langen put it. Which brings us to September 2008.
You’ll recall how that panned out. Insurance-style payments owed by AIG, Lehmans and many others couldn’t be covered as the financial markets blew up. Short of canceling private contracts made under the law, Washington opted to step in and the salvage the insurer, but not the investment bank, making good its payments with taxpayer cash. The same decision to honor private financial contracts – protection of banking deposits chief amongst them – was made across Europe, flipping the region’s already over-stretched public finances into their sharpest peace-time deficits in modern history. Now that same taxpayer cash, still propping up the banks’ balancesheets, is itself at risk, this time from a run of legally-recognized contracts, demanding payment when sovereign nations – those entities which decided and paid the bail-out to banks – fail to pay their own debts, swollen by those very same banking bail-outs.
The EU Parliament is developing a sweet tooth for such bitter ironies. This summer will see its new European Supervisory Authority on Securities and Markets (ESMA) start supervising credit rating agencies “directly”, whatever that means. Because as German Liberal MEP Wolf Klinz explained Strasbourg’s political anger this spring, “Credit rating agencies both rated [subprime] assets and at the same time were rendering advice services to the clients who were paying for the rating…
“An agency can [even] advise an investment bank how to structure a product to get the highest rating,” the EU Parliament’s news-service goes on, “although the product itself is thereby not made safer, it only looks like it is. Such irresponsible but highly profitable behaviour made the [banking] crisis worse, so governments (ie, taxpayers) had to go even deeper into debt to rescue their financial systems. However, worried by this increase in debt, the agencies are now downgrading countries and their bonds (the lower the rating, the higher interest rate and the higher debt burden), forcing the taxpayer to pay even more; governments respond with slashing spending on e.g. social services to placate ‘the markets’.”
Supervising credit agencies “directly” seems unlikely to encourage higher ratings on Eurozone sovereigns. Banning naked CDS will not make Greece solvent, give jobs to Spain’s under-25s, or fill Ireland’s ghost-town housing developments. Trying to avoid the financial and legal chaos of a “credit event” however – let alone paying profits to “predator” hedge funds (copyright Nicholas Sarkozy, 2007) out of the very same taxpayer bail-outs used to rescue the banks – looks set to prolong the pain in Athens.
Or maybe Greece won’t wait.
http://blogs.forbes.com/greatspecula...greek-default/
Why Europe Is Really Freaked Out Over A Greek Default
Jul. 15 2011 - 9:20 am | 1,147 views | 0 recommendations | 0 comments
Posted by Adrian Ash
European Central Bank chief Jean-Claude Triche...
European Central Bank chief Jean-Claude Trichet
“The constraints imposed by market forces [on government deficits inside a single-currency union] might either be too slow and weak, or too sudden and disruptive.”
- The Delors Committee report on European monetary union, getting it exactly right in 1989
GREEK BONDS have lost one-half to three-quarters of their face value. Six national strikes have all ended in violence already this year. In the three months to April, public investment spending fell 42% from the start of 2010, but total spending still rose – and tax revenues sank – forcing the budget deficit still wider as the economy shrank 5.5% year-on-year.
What to do? Greece’s debt cannot be serviced, much less repaid. Everything says default – stop paying, write it down or write it off, with or without the lenders’ consent. Default is certain, and history says it would be better for creditors if the restructuring came before Greece misses a payment.
Uruguay’s “pre-emptive” restructuring of 2003, for instance, cost its creditors 8% of their money, according to an IMF study. Argentina’s “post-default” restructuring of 2005, in contrast, cost the affected bondholders some 75% of their original investment.
Yet incredibly, most everyone outside Greece – everyone who thinks they have a vested interest, at least – wants restructuring delayed and delayed again. Why? Because of the banks, stupid.
Only just rescued by taxpayers in 2007-2010, no one knows how badly the banking system will fare when a Greek (or Irish, Portuguese, Spanish or Italian) default strikes. Not through capital loss on the bonds; that’s likely to be a drop in the bucket.
Nor is the loss of Greek bonds as collateral – securities against which banks can borrow – the big issue either. In that market, “Greek state bonds have already been marked down by close to half their face value,” says John Dizard at the FT, and besides, the European Central Bank is holding most of those. (So you can imagine the ECB’s position on writing them off to zero.) In the private market, the “haircut” on credit extended against Irish and Portuguese bonds by LCH.Clearnet, a leading clearing house, has already gone to “75% and 65% respectively” says Tamara Burnell, head of sovereign research at London’s M&G Credit Analysis team.
No, instead, it’s the money owed to holders of credit default swaps – derivative contracts insuring against failed debt repayment – that risk taking the world straight back to September 2008. One estimate puts the insurance cover at 25% of Greece’s outstanding debt. Another private estimate reaching us here at BullionVault puts the gross CDS insurance cover at twice Greece’s €340 billion of outstanding debt.
Either way, the sheer scale of those claims would explain why the European Parliament is racing to make “profiteering” from a sovereign Euro default illegal. (So-called “naked CDS”, where the claimant doesn’t hold the bonds, but is betting that a default is coming, have become a big issue for Euro politicians, as we’ll see below.) It also explains why “The United States was concerned about a default on debt by Irish banks,” as Dublin’s former finance minister Brian Lenihan revealed in April.
“He said the U.S. was concerned about credit default swap contracts being triggered,” reported The Irish Times, “although he did not say why.”
Anyway, back in the Greek crisis, “European banks are long about 17% of the €340 billion of total Greek sovereign debt outstanding,” reckons Niels Jensen at Absolute Return Partners. “A 65% haircut [ie, write-off] would result in losses of €37-38 billion, not enough to create anything remotely looking like systemic risk.” Shared across Western Europe’s banking sector, in fact, the bond loss itself would be nothing compared to the IMF’s estimate of $1.4 billion lost in the region during the financial crisis of 2007-2010.
Even in credit default swaps – those contracts which “allow a buyer of credit protection to pay [an interest-rate] spread to the credit protection seller, in return for a settlement in case the [original debtor] incurs a credit event,” as a handy cut-out-and-keep guide from 2005 put it – a Greek default would see “the overall net pay-out [of] only $5 billion,” reports the Financial Times.
Because Bank A’s pay-out would enable Bank B to meet its Greek insurance promise to Bank C, who in turn could then settle with Bank A. That net end-result would take some reaching, however, and the $5bn estimate – merely reflecting US bank exposure, it seems – “may not truly reflect the size of potential losses for some banks,” the FT goes on. “The gross CDS exposure on Greece is $79bn and some analysts speculate that any one bank may have to pay out as much as $25bn.”
Note that word “may.” Because “there is no way of finding out about these [CDS] exposures,” as analysts at BNP Paribas reminded everyone in Jan. 2010. Credit-default swaps were long traded ‘over the counter’, buyer-to-seller direct, with no central exchange or clearing-house recording every transaction for posterity.
The U.S. authorities have been racing to get CDS at least cleared through a recognized “central clearing party,” somewhere they can monitor the liabilities, if not prevent the clearer going down amid a disorderly run of claims. But in the Bank for International Settlements’ data – source of all the big figures above – some 6% of the global total for OTC derivatives comes from “estimated positions” based on a survey from four years ago. More telling still, that 6% outweighs the reported total of CDS, but “excludes [unreported] CDS for all countries except for the U.S.”
Now, on those same data from the Bank for International Settlements, gross Greek CDS cover equals 3% of the total government-debt insurance market worldwide – a signficant chunk compared with Athens’ share of total government debt in issue, now sitting at 0.9% by our maths today. So either Greece looks disproportionately shakey to bondholders (you don’t say), or it’s been over-insured by its bondholders, or it’s been insured by people who don’t yet own any Greek bonds, but who want to cash in when it defaults. Or all three at once.
When U.S. auto parts maker Delphi filed for Chapter 11 bankruptcy in 2005, for instance, “the volume of CDS outstanding was estimated at $28 billion against $5.2 billion of bonds and loans,” according to derivatives expert Satyajit Das. And just as your insurance company might take possession of your wrecked car when it pays out – or it might demand receipts as proof of purchase on a household claim – so a big slug of those CDS on Delphi “require[d] the insured party to turn the underlying bonds over to the insurer when the payment [was] received,” explained J.P.Morgan’s Eric Rosen at a Wharton conference.
But not all CDS demanded delivery of the underlying bond, says Das. Which brings us to politics.
“Credit-default swaps, where you insure your neighbor’s house just to destroy it and make money from it, that’s exactly what we have to curb,” said German chancellor Angela Merkel back in March 2010. “We must prevent speculative actions from causing so much uncertainty on the market that prices no longer provide accurate information and state financing reaches a fundamentally unjustifiable high level,” she wrote – together with the political leaders of France, Greece and Luxembourg, also in March 2010 – urging an EU enquiry into “a well-founded suspicion that speculative practices are having a considerable impact on the development of [government bond] yields.”
At the time, most financial journalists and commentators outside the Eurozone found this laughable. But in Spain, daily paper El Pais (among others) claimed that hedge funds and the Anglo-Saxon media were working together to push up CDS prices, thus driving down bonds (who’d buy a bond costing a fortune to insure?) and forcing Eurozone governments to pay ever-higher financing costs.
Yes, seriously. It even said the Spanish secret police were investigating, and pointed to the Financial Times and Economist as sources of reckless comment.
Amid this frenzy, Merkel and Sarkozy asked the EU Commission to “also consider introducing minimum holding periods for CDS trading, banning speculative CDS trading, as well as banning the acquisition of CDS which are not being used for hedging purposes.” A wish which has now very nearly been granted – but only at the snail’s pace of Euro politics.
“Of course the ban on naked CDS will not solve the fiscal problems of Greece or Ireland. Nevertheless, when you face such a situation, you can choose to add fuel to the fire or put water on it. These instruments should not be used as a speculative tool anymore.”
So said French Green Party MEP Pascal Canfin in February, after filing a report on CDS in January. Putting his proposals before the EU Parliament took until last week, however, and even then “the plenary vote was only used to collect significant majorities which should strengthen the hand of MEP negotiators in their ongoing talks with Member States,” as Strasbourg’s press release says. The discussion “decided the Parliament’s stance”; it did not ban naked CDS, and the enforcement date entered isn’t until 1 July 2012. For now, “OTC derivatives trading is not subject to any legislation other than that between the contracting parties,” as German MEP Werner Langen put it. Which brings us to September 2008.
You’ll recall how that panned out. Insurance-style payments owed by AIG, Lehmans and many others couldn’t be covered as the financial markets blew up. Short of canceling private contracts made under the law, Washington opted to step in and the salvage the insurer, but not the investment bank, making good its payments with taxpayer cash. The same decision to honor private financial contracts – protection of banking deposits chief amongst them – was made across Europe, flipping the region’s already over-stretched public finances into their sharpest peace-time deficits in modern history. Now that same taxpayer cash, still propping up the banks’ balancesheets, is itself at risk, this time from a run of legally-recognized contracts, demanding payment when sovereign nations – those entities which decided and paid the bail-out to banks – fail to pay their own debts, swollen by those very same banking bail-outs.
The EU Parliament is developing a sweet tooth for such bitter ironies. This summer will see its new European Supervisory Authority on Securities and Markets (ESMA) start supervising credit rating agencies “directly”, whatever that means. Because as German Liberal MEP Wolf Klinz explained Strasbourg’s political anger this spring, “Credit rating agencies both rated [subprime] assets and at the same time were rendering advice services to the clients who were paying for the rating…
“An agency can [even] advise an investment bank how to structure a product to get the highest rating,” the EU Parliament’s news-service goes on, “although the product itself is thereby not made safer, it only looks like it is. Such irresponsible but highly profitable behaviour made the [banking] crisis worse, so governments (ie, taxpayers) had to go even deeper into debt to rescue their financial systems. However, worried by this increase in debt, the agencies are now downgrading countries and their bonds (the lower the rating, the higher interest rate and the higher debt burden), forcing the taxpayer to pay even more; governments respond with slashing spending on e.g. social services to placate ‘the markets’.”
Supervising credit agencies “directly” seems unlikely to encourage higher ratings on Eurozone sovereigns. Banning naked CDS will not make Greece solvent, give jobs to Spain’s under-25s, or fill Ireland’s ghost-town housing developments. Trying to avoid the financial and legal chaos of a “credit event” however – let alone paying profits to “predator” hedge funds (copyright Nicholas Sarkozy, 2007) out of the very same taxpayer bail-outs used to rescue the banks – looks set to prolong the pain in Athens.
Or maybe Greece won’t wait.
http://blogs.forbes.com/greatspecula...greek-default/
- #64
- Last Post: Edited Jul 25, 2011 9:58am Jul 24, 2011 11:44pm | Edited Jul 25, 2011 9:58am
I dont necessarily agree 100% with all of them, but I am sure this is a piece of writing to print, and keep for permanent re-reading!
The 25 Point Mantra
Discipline for Daytrading
By Douglas E. Zalesky
The success that a trader achieves in the markets is directly correlated to one’s trading discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is very simple:Trade with discipline and you will succeed; trade without discipline and you will fail.
I have been a trader and member of the Chicago Board of Trade (CBOT) for 20 years.
During my successful pit-trading career as a scalper, I traded in three different contract markets: 30-Year Treasury bonds at the CBOT, the S&P 500 at the Chicago Mercantile Exchange (CME) and the Gilts at the London International Financial Futures Exchange (LIFFE). Currently, I also trade the electronic $5 Dow futures contract on the CBOT as time permits.
Although my formal academic education consists of a bachelor’s degree in business administration from the University of Denver, I never considered myself to be an extremely gifted student. I have no formal training in market technical analysis. I’m unable to even set up a Fibonacci study or Moving Average study on a charting package, let alone know how to trade with such data. I have no formal training in market fundamental analysis. I don’t understand the economic causal relationship between the actions of the Federal Open Market Committee and Treasury bond prices or equity prices.
How, then, have I been able to succeed, day after day, trading the markets for more than 20 years? The answer is simple: I trade with discipline, and I respect the market. When I’m wrong I get out immediately, and when I’m right, I don’t get too greedy. I’m content
with small winners and I’m accepting of small losers.
Just as I now mentor my trading clients regarding performance, discipline and profit/loss management, I was mentored by one of the best traders ever to set foot on the CBOT trading floor, David Goldberg. David was a long-time spread scalper in the wheat pit and a principal of Goldberg Bros., at the time one of the largest clearing firms at the CBOT, CME and Chicago Board Options Exchange (CBOE). David taught me the rules of trading discipline. I listened to his guidance and gradually, over time, became more and more successful. The student has now become the teacher.
The Wheel of Success
There are three spokes that make up, what I call the “Wheel of Success” as it relates to trading. The first spoke is content. Content consists of all the external and internal market information that traders utilize to make their trading decisions. All traders must purchase value-added content that provides utility in making their trading decisions.
The most important type of content is internal market information (IMI). IMI simply is time and price information as disseminated by the exchanges. After all, we all make our trading decisions in the present tense based on time and price. In order to “scalp” the markets effectively, we must have the most live and up-to-date time and price information seamlessly delivered to our PCs through a reliable execution platform and/or charting package. Without instantaneous time and price information, we would be trading in the dark.
The second spoke is mechanics. Mechanics is how you access the markets and the methodology that you employ to enter/exit your trades. You must master mechanics before you can enjoy any success as a trader. A simple keystroke error can result in a loss of thousands of dollars. A trader can ruin his entire day with an inadvertent
trade entry error.
Once you have mastered order execution, though, it is like riding a bike. The process of entering and exiting trades becomes seamless and mindless. Fast and efficient trade execution, especially if you are trading with a scalping methodology, will enable you to hit a bid or take an offer before your competitors do. Remember, the fastest survive.
The third and most important spoke in the Wheel of Success is discipline. You must attain discipline if you ever hope to achieve any level of trading success. Trading discipline is practiced 100 percent of the time, every trade, every day.
Review the following 25 Rules of Trading Discipline. You must condition yourself to behave with discipline over and over again. Many of my traders and clients read through the rules every day (believe it or not) before the trading session begins. It doesn’t take more than three minutes to read through them. Think of the exercise as praying — reminding you how to conduct yourself throughout the trading session.
#1 THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline = INCREASED PROFITS.
#2 BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100% OF THE TIME.
Being disciplined is of the utmost importance, but it’s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in awhile, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on EVERY TRADE.
#3 ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size.
It’s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two - - or even scratch the trade - - and then raise your trade size after two consecutive winning trades.
#4 NEVER TURN A WINNER INTO A LOSER.
We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold onto the trade in hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss.
There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance for the day. DON’T BE GREEDY.
#5 YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S&P points, then do not allow a losing trade to exceed those five points. If you do allow a lose to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. NOT GOOD.
#6 DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
I require my “students” to actually write down the specific market prerequisites (your setups) that must take place in order for them to make a trade. I don’t necessarily care what the methodology is, but I do want them to make sure that they have a set of rules, market setups or price action that must appear in order for them to take the trade. You must have a game plan.
If you have a proven methodology but it doesn’t seem to be working in a given trading session, don’t go home that night and try to devise another one. If your methodology works more than on-half of the trading sessions, then STICK WITH IT.
#7 BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didn’t possess the emotional or psychological skill set to trade such a big size. That’s OK I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would “butcher” the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with 10 lots.
Learn to except your comfort zone as it relates to your trade size. YOU ARE WHO YOU ARE.
#8 YOU ALWAYS WANT TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds.
I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed $500. Once you reach the $500 loss limit, you must turn your PC off and call it a day. YOU CAN ALWAYS COME BACK TOMORROW.
#9 EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can’t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot?
I demand that my students show me a trading profit over the course of ten consecutive trading days trading a one lot only. When they have achieved a profitable ten-day period, in my eyes, they have earned the right to trade a two lot for the next ten trading sessions.
REMEMBER: if you are trading poorly two lots you must lower your trade size down to a one lot.
#10 GET OUT OF YOUR LOSERS.
You are not a “loser” because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. It’s amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it’s probably no good. Time to exit.
Every trader has losing trades throughout the session. A typical trade day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They don’t cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a WINNER.
#11 THE FIRST LOSS IS THE BEST LOSS.
Once you come to the realization that your trade is no good it’s best to exit immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said to tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time TO EXIT.
#12 DON’T HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.
When I was new and undisciplined trader, I can’t tell you how many times that I prayed to the “Bond God”. My prayers were a plea to help me out of a less-than-pleasant trade position. I would pry for some divine intervention that, by the way, never materialized. I soon realized that praying to the “Bond god” or any other “Futures god” was a wasted exercise. JUST GET OUT.
#13 DON’T WORRY ABOUT NEWS. IT’S HISTORY.
I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The “talking heads” on these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded a lot in any pit on any exchange. Yet they claim to be experts on everything.
Before becoming a “trading and markets expert”, the guy on CNBC reporting hourly from the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others, can provide no utility to you. Treat it for what it really is…entertainment.
The fact is: The reporting that you hear on the business programs is “old news”. The story has already been dissected and consumed by the professional market participants long before the “news” has been disseminated. Do not trade off of the reporting. IT’S TO LATE.
#14 DON’T SPECULATE. IF YOU DO, YOU WILL LOSE.
In all of the years I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently print large winners. DON’T BE A SPECULATOR. BE A TRADER.
Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
#15 LOVE TO LOSE MONEY.
This Rule is the one I get the most questions and feedback on by traders from all over the world. Traders ask, “What do you mean to lose money. Are you crazy?
No, I’m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.
#16 IF YOUR TRADE IS NOT GOING ANYWHERE IN A GIVEN TIMEFRAME, IT’S TIME TO EXIT.
This rule relates to the theory of capital flow. It is trading capital that pushes the market one way or another. An oversupply or imbalance of buy orders will push the market up. An oversupply of sell orders will push the market lower.
When price stagnation is present (as typically happens many times throughout the trading session), the market and its participants are telling us that, at the present time, they are happy or satisfied with the prevailing bid and offer.
You don’t want to be in the market at these times. The market is not going anywhere. It is a waste of time, capital and emotional energy. It’s much better to wait for the market to heat up a little and then place your trade.
#17 NEVER TAKE A BIG LOSS. ONLY A BIG LOSS CAN HURT YOU.
Please review rules #5, #8, #10, #11, #15. If you follow any one of these rules you will never violate rule #17.
Big losses prevent you from having a winning day. They wipe out too many small winners that you have worked so hard to achieve. Big losses also “kill you” from a psychological and emotional standpoint. It takes a long time to get your confidence back after taking a big loss on a trade.
#18 MAKE A LITTLE BIT EVERYDAY. DIG YOUR DITCHES. DON’T FILL THEM IN.
When I was a young bond trader, my goal everyday was to make 10 bond tics. A tic is $31.25, so if I made 10 tics on the day, I would be up $312.50.
It may not sound like a lot of money to you, but it was surely was to me. My mentor, David Goldberg, told me that if I could make 10 bond tics every trading day of the year, at the end of the year I would be up $72,500 in my trading account. Not bad for a 23-year old kid in 1982.
It is amazing how quickly your trading account will build up over time just by making a little bit every day. If you are a new e-Mini S&P trader try to make just 5 or 6 points per day. If you can do that you’ll have that $72,000 at the end of the year.
#19 HIT SINGLES NOT HOME RUNS.
Just as I don’t know of any successful speculators, I don’t know of any trader who goes into a trade expecting to hit a home run and then actually having it happen. You should never approach a trade with the idea that it’s going to be a huge winner. Sometimes they turn out that way, but the times that I have hit a home run on a position is definitely luck, not skill.
My intent on the trade was to produce a small winner but, because I had the trade on, and at the same time (as luck would have it) the Fed unexpectedly entered the market, I unwittingly had a huge winner. This probably has happened to me less than five times in 20 years.
#20 CONSISTENCY BUILDS CONFIDENCE AND CONTROL.
How nice is it to be able to turn on your PC in the morning knowing that if you play by the Rules, trade with discipline and stick to your methodology, the probability of a successful day is high.
I’ve had years where I could count on one hand the number of losing days that I had. Don’t you think that this consistency allowed me to be extremely confident? I knew that I was going to make money on any given day. Why would I think otherwise? Making a little bit everyday (Rules #18 and #19) will allow you to trade throughout the trading session with confidence and control.
Remember rule #9: If you make a little bit every day, then you have earned the right to trade bigger. Thus, by following the RULES OF DISCIPLINE, your “little bit” can soon turn into much more profitable days.
#21 LEARN TO SWEAT OUT (SCALE OUT) YOU’RE WINNERS.
The net effect of scaling out of your winners will be an increased average win per trade while keeping your losses to your pre-defined risk parameters.
You should never scale out of your losers. If your trade size is more than a one lot and your trade is a loser, you must exit the entire position en masse. If your trade size is more than a one lot and your trade is a winner, it is best to exit one-half of your position at your first price target.
If you trade with protective stop-loss orders, you should amend the order to reflect the change in trade size (remember you have exited one-half of your position) and raise or lower the stop price, depending on whether it’s a long or short position, to your original initiating trade entry price. You now are essentially “playing with the house’s money”. You can’t lose on the remaining position, and that’s obviously a fantastic position in which to put yourself. Place a limit order a few tics above or below the market, depending on your position, SIT BACK AND RELAX.
#22 MAKE THE SAME TYPE OF TRADES OVER AND OVER AGAIN – BE A BRICKLAYER.
A bricklayer shows up for work every day of his working life and executes with the same methodology – brick by brick by brick.
The same consistency applies to traders, as well. Please review Rules #6 and #20. I have not changed my trading methodology and execution strategy in 20 years. I guess I’m the bricklayer.
#23 DON’T OVER-ANALYZE. DON’T PROCRASTINATE. DON’T HESITATE. IF YOU DO, YOU WILL LOSE.
I can’t tell you how many times traders have come into my office terribly depressed because they “knew” the market was going one way or another; however, they failed to put a position on. When I ask them why they did not put the trade on, their responses are always the same: they did not want to chase the market. They were waiting to be filled at the absolute best possible price (and never got filled), or only two out of three of their market indicators were present and they were waiting on the third.
The net result of all this procrastination and hesitation is the trader was correct in deducing market direction but his profit on the trade was zero. We don’t get paid in this business unless we put the trade on. Don’t over-analyze the trade. Place the trade then manage it. If you’re wrong, get out. But you’ll never be right unless you actually make the trade.
#24 ALL TRADERS ARE CREATED EQUAL IN THE EYES OF THE MARKET.
We all start out the day the same. We all start out at zero. Once the bell rings and trading begins, it’s how we conduct ourselves from a behavioral standpoint that will dictate whether or not we will make money on the day. If you follow the 25 RULES, you should do well. If you do not, you will do poorly.
#25 IT’S THE MARKET ITSELF THAT WIELDS THE ULTIMATE SCALE OF JUSTICE.
The market moves wherever it wants to go. It does not care about you or me. It does not play favorites. It does not discriminate. It does not intentionally harm any one individual. The market is always right.
You must learn to respect the market. The market will mercilessly punish you if you do not play by the RULES. Learn to condition yourself to play by the 25 Rules of Trading Discipline and you will be rewarded.
The 25 Point Mantra
Discipline for Daytrading
By Douglas E. Zalesky
The success that a trader achieves in the markets is directly correlated to one’s trading discipline or lack thereof. Trading discipline is 90 percent of the game. The formula is very simple:Trade with discipline and you will succeed; trade without discipline and you will fail.
I have been a trader and member of the Chicago Board of Trade (CBOT) for 20 years.
During my successful pit-trading career as a scalper, I traded in three different contract markets: 30-Year Treasury bonds at the CBOT, the S&P 500 at the Chicago Mercantile Exchange (CME) and the Gilts at the London International Financial Futures Exchange (LIFFE). Currently, I also trade the electronic $5 Dow futures contract on the CBOT as time permits.
Although my formal academic education consists of a bachelor’s degree in business administration from the University of Denver, I never considered myself to be an extremely gifted student. I have no formal training in market technical analysis. I’m unable to even set up a Fibonacci study or Moving Average study on a charting package, let alone know how to trade with such data. I have no formal training in market fundamental analysis. I don’t understand the economic causal relationship between the actions of the Federal Open Market Committee and Treasury bond prices or equity prices.
How, then, have I been able to succeed, day after day, trading the markets for more than 20 years? The answer is simple: I trade with discipline, and I respect the market. When I’m wrong I get out immediately, and when I’m right, I don’t get too greedy. I’m content
with small winners and I’m accepting of small losers.
Just as I now mentor my trading clients regarding performance, discipline and profit/loss management, I was mentored by one of the best traders ever to set foot on the CBOT trading floor, David Goldberg. David was a long-time spread scalper in the wheat pit and a principal of Goldberg Bros., at the time one of the largest clearing firms at the CBOT, CME and Chicago Board Options Exchange (CBOE). David taught me the rules of trading discipline. I listened to his guidance and gradually, over time, became more and more successful. The student has now become the teacher.
The Wheel of Success
There are three spokes that make up, what I call the “Wheel of Success” as it relates to trading. The first spoke is content. Content consists of all the external and internal market information that traders utilize to make their trading decisions. All traders must purchase value-added content that provides utility in making their trading decisions.
The most important type of content is internal market information (IMI). IMI simply is time and price information as disseminated by the exchanges. After all, we all make our trading decisions in the present tense based on time and price. In order to “scalp” the markets effectively, we must have the most live and up-to-date time and price information seamlessly delivered to our PCs through a reliable execution platform and/or charting package. Without instantaneous time and price information, we would be trading in the dark.
The second spoke is mechanics. Mechanics is how you access the markets and the methodology that you employ to enter/exit your trades. You must master mechanics before you can enjoy any success as a trader. A simple keystroke error can result in a loss of thousands of dollars. A trader can ruin his entire day with an inadvertent
trade entry error.
Once you have mastered order execution, though, it is like riding a bike. The process of entering and exiting trades becomes seamless and mindless. Fast and efficient trade execution, especially if you are trading with a scalping methodology, will enable you to hit a bid or take an offer before your competitors do. Remember, the fastest survive.
The third and most important spoke in the Wheel of Success is discipline. You must attain discipline if you ever hope to achieve any level of trading success. Trading discipline is practiced 100 percent of the time, every trade, every day.
Review the following 25 Rules of Trading Discipline. You must condition yourself to behave with discipline over and over again. Many of my traders and clients read through the rules every day (believe it or not) before the trading session begins. It doesn’t take more than three minutes to read through them. Think of the exercise as praying — reminding you how to conduct yourself throughout the trading session.
#1 THE MARKET PAYS YOU TO BE DISCIPLINED.
Trading with discipline will put more money in your pocket and take less money out. The one constant truth concerning the markets is that discipline = INCREASED PROFITS.
#2 BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU. BUT DON’T CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100% OF THE TIME.
Being disciplined is of the utmost importance, but it’s not a sometimes thing, like claiming you quit a bad habit, such as smoking. If you claim to quit smoking but you sneak a cigarette every once in awhile, then you clearly have not quit smoking. If you trade with discipline nine out of ten trades, then you can’t claim to be a disciplined trader. It is the one undisciplined trade that will really hurt your overall performance for the day. Discipline must be practiced on EVERY TRADE.
#3 ALWAYS LOWER YOUR TRADE SIZE WHEN YOU’RE TRADING POORLY.
All good traders follow this rule. Why continue to lose on five lots (contracts) per trade when you could save yourself a lot of money by lowering your trade size down to one lot on your next trade? If I have two losing trades in a row, I always lower my trade size down to one lot. If my next two trades are profitable, then I move my trade size back up to my original lot size.
It’s like a batter in baseball who has struck out his last two times at bat. The next time up he will choke up on the bat, shorten his swing and try to make contact. Trading is the same: lower your trade size, try to make a tick or two - - or even scratch the trade - - and then raise your trade size after two consecutive winning trades.
#4 NEVER TURN A WINNER INTO A LOSER.
We have all violated this rule. However, it should be our goal to try harder not to violate it in the future. What we are really talking about here is the greed factor. The market has rewarded you by moving in the direction of your position, however, you are not satisfied with a small winner. Thus you hold onto the trade in hopes of a larger gain, only to watch the market turn and move against you. Of course, inevitably you now hesitate and the trade further deteriorates into a substantial loss.
There’s no need to be greedy. It’s only one trade. You’ll make many more trades throughout the session and many more throughout the next trading sessions. Opportunity exists in the marketplace all of the time. Remember: No one trade should make or break your performance for the day. DON’T BE GREEDY.
#5 YOUR BIGGEST LOSER CAN’T EXCEED YOUR BIGGEST WINNER.
Keep a trade log of all your trades throughout the session. If, for example, you know that, so far, your biggest winner on the day is five e-Mini S&P points, then do not allow a losing trade to exceed those five points. If you do allow a lose to exceed your biggest gain then, effectively, what you have when you net out the biggest winner and biggest loss is a net loss on the two trades. NOT GOOD.
#6 DEVELOP A METHODOLOGY AND STICK WITH IT. DON’T CHANGE METHODOLOGIES FROM DAY TO DAY.
I require my “students” to actually write down the specific market prerequisites (your setups) that must take place in order for them to make a trade. I don’t necessarily care what the methodology is, but I do want them to make sure that they have a set of rules, market setups or price action that must appear in order for them to take the trade. You must have a game plan.
If you have a proven methodology but it doesn’t seem to be working in a given trading session, don’t go home that night and try to devise another one. If your methodology works more than on-half of the trading sessions, then STICK WITH IT.
#7 BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
In all my years as a trader I never traded more than a 50 lot on any individual trade. Sure, I would have liked to be able to trade like colleagues in the pit who were regularly trading 100 or 200 lots per trade. However, I didn’t possess the emotional or psychological skill set to trade such a big size. That’s OK I knew that my comfort zone was somewhere between 10 and 20 lots per trade. Typically, if I traded more than 20 lots, I would “butcher” the trade. Emotionally I could not handle that size. The trade would inevitably turn into a loser because I could not trade with the same talent level that I possessed with 10 lots.
Learn to except your comfort zone as it relates to your trade size. YOU ARE WHO YOU ARE.
#8 YOU ALWAYS WANT TO COME BACK AND PLAY THE NEXT DAY.
Never put yourself in the precarious position of losing more money than you can afford. The worst feeling in the world is wanting to trade and not being able to do so because the equity in your account is too low and your brokerage firm will not allow you to continue unless you submit more funds.
I require my students to place daily downside limits on their performance. For example, your daily loss limit can never exceed $500. Once you reach the $500 loss limit, you must turn your PC off and call it a day. YOU CAN ALWAYS COME BACK TOMORROW.
#9 EARN THE RIGHT TO TRADE BIGGER.
Too many new traders think that because they have $25,000 equity in their trading account that they somehow have the right to trade five or ten e-Mini S&P contracts. This cannot be further from the truth. If you can’t trade a one lot successfully, what makes you think that you have the right to trade a 10 lot?
I demand that my students show me a trading profit over the course of ten consecutive trading days trading a one lot only. When they have achieved a profitable ten-day period, in my eyes, they have earned the right to trade a two lot for the next ten trading sessions.
REMEMBER: if you are trading poorly two lots you must lower your trade size down to a one lot.
#10 GET OUT OF YOUR LOSERS.
You are not a “loser” because you have a losing trade on. You are, however, a loser if you do not get out of the losing trade once you recognize that the trade is no good. It’s amazing to me how accurate your gut is as a market indicator. If, in your gut, you have the idea that the trade is no good then it’s probably no good. Time to exit.
Every trader has losing trades throughout the session. A typical trade day for me consists of 33 percent losing trades, 33 percent scratches and 33 percent winners. I exit my losers very quickly. They don’t cost me much. So, although I have either lost or scratched over two-thirds of my trades for the day, I still go home a WINNER.
#11 THE FIRST LOSS IS THE BEST LOSS.
Once you come to the realization that your trade is no good it’s best to exit immediately. “It’s never a loser until you get out” and “Not to worry, it’ll come back” are often said to tongue in cheek, by traders in the pit. Once the phrase is stated, it is an affirmation that the trader realizes that the trade is no good, it is not coming back and it is time TO EXIT.
#12 DON’T HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.
When I was new and undisciplined trader, I can’t tell you how many times that I prayed to the “Bond God”. My prayers were a plea to help me out of a less-than-pleasant trade position. I would pry for some divine intervention that, by the way, never materialized. I soon realized that praying to the “Bond god” or any other “Futures god” was a wasted exercise. JUST GET OUT.
#13 DON’T WORRY ABOUT NEWS. IT’S HISTORY.
I have never understood why so many electronic traders listen to or watch CNBC, MSNBC, Bloomberg News or FNN all day long. The “talking heads” on these programs know very little about market dynamics and market price action. Very few, if any, have ever even traded a lot in any pit on any exchange. Yet they claim to be experts on everything.
Before becoming a “trading and markets expert”, the guy on CNBC reporting hourly from the Bond Pit, was a phone clerk on the trading floor. Obviously this qualifies him to be an expert! He, and others, can provide no utility to you. Treat it for what it really is…entertainment.
The fact is: The reporting that you hear on the business programs is “old news”. The story has already been dissected and consumed by the professional market participants long before the “news” has been disseminated. Do not trade off of the reporting. IT’S TO LATE.
#14 DON’T SPECULATE. IF YOU DO, YOU WILL LOSE.
In all of the years I have been a trader and associated with traders, I have never met a successful speculator. It is impossible to speculate and consistently print large winners. DON’T BE A SPECULATOR. BE A TRADER.
Short-term scalping of the markets is the answer. The probability of a winning day or week is greatly increased if you trade short term: small winners and even smaller losses.
#15 LOVE TO LOSE MONEY.
This Rule is the one I get the most questions and feedback on by traders from all over the world. Traders ask, “What do you mean to lose money. Are you crazy?
No, I’m not crazy. What I mean is to accept the fact that you are going to have losing trades throughout the trading session. Get out of your losers quickly. Love to get out of your losers quickly. It will save you a lot of trading capital and will make you a much better trader.
#16 IF YOUR TRADE IS NOT GOING ANYWHERE IN A GIVEN TIMEFRAME, IT’S TIME TO EXIT.
This rule relates to the theory of capital flow. It is trading capital that pushes the market one way or another. An oversupply or imbalance of buy orders will push the market up. An oversupply of sell orders will push the market lower.
When price stagnation is present (as typically happens many times throughout the trading session), the market and its participants are telling us that, at the present time, they are happy or satisfied with the prevailing bid and offer.
You don’t want to be in the market at these times. The market is not going anywhere. It is a waste of time, capital and emotional energy. It’s much better to wait for the market to heat up a little and then place your trade.
#17 NEVER TAKE A BIG LOSS. ONLY A BIG LOSS CAN HURT YOU.
Please review rules #5, #8, #10, #11, #15. If you follow any one of these rules you will never violate rule #17.
Big losses prevent you from having a winning day. They wipe out too many small winners that you have worked so hard to achieve. Big losses also “kill you” from a psychological and emotional standpoint. It takes a long time to get your confidence back after taking a big loss on a trade.
#18 MAKE A LITTLE BIT EVERYDAY. DIG YOUR DITCHES. DON’T FILL THEM IN.
When I was a young bond trader, my goal everyday was to make 10 bond tics. A tic is $31.25, so if I made 10 tics on the day, I would be up $312.50.
It may not sound like a lot of money to you, but it was surely was to me. My mentor, David Goldberg, told me that if I could make 10 bond tics every trading day of the year, at the end of the year I would be up $72,500 in my trading account. Not bad for a 23-year old kid in 1982.
It is amazing how quickly your trading account will build up over time just by making a little bit every day. If you are a new e-Mini S&P trader try to make just 5 or 6 points per day. If you can do that you’ll have that $72,000 at the end of the year.
#19 HIT SINGLES NOT HOME RUNS.
Just as I don’t know of any successful speculators, I don’t know of any trader who goes into a trade expecting to hit a home run and then actually having it happen. You should never approach a trade with the idea that it’s going to be a huge winner. Sometimes they turn out that way, but the times that I have hit a home run on a position is definitely luck, not skill.
My intent on the trade was to produce a small winner but, because I had the trade on, and at the same time (as luck would have it) the Fed unexpectedly entered the market, I unwittingly had a huge winner. This probably has happened to me less than five times in 20 years.
#20 CONSISTENCY BUILDS CONFIDENCE AND CONTROL.
How nice is it to be able to turn on your PC in the morning knowing that if you play by the Rules, trade with discipline and stick to your methodology, the probability of a successful day is high.
I’ve had years where I could count on one hand the number of losing days that I had. Don’t you think that this consistency allowed me to be extremely confident? I knew that I was going to make money on any given day. Why would I think otherwise? Making a little bit everyday (Rules #18 and #19) will allow you to trade throughout the trading session with confidence and control.
Remember rule #9: If you make a little bit every day, then you have earned the right to trade bigger. Thus, by following the RULES OF DISCIPLINE, your “little bit” can soon turn into much more profitable days.
#21 LEARN TO SWEAT OUT (SCALE OUT) YOU’RE WINNERS.
The net effect of scaling out of your winners will be an increased average win per trade while keeping your losses to your pre-defined risk parameters.
You should never scale out of your losers. If your trade size is more than a one lot and your trade is a loser, you must exit the entire position en masse. If your trade size is more than a one lot and your trade is a winner, it is best to exit one-half of your position at your first price target.
If you trade with protective stop-loss orders, you should amend the order to reflect the change in trade size (remember you have exited one-half of your position) and raise or lower the stop price, depending on whether it’s a long or short position, to your original initiating trade entry price. You now are essentially “playing with the house’s money”. You can’t lose on the remaining position, and that’s obviously a fantastic position in which to put yourself. Place a limit order a few tics above or below the market, depending on your position, SIT BACK AND RELAX.
#22 MAKE THE SAME TYPE OF TRADES OVER AND OVER AGAIN – BE A BRICKLAYER.
A bricklayer shows up for work every day of his working life and executes with the same methodology – brick by brick by brick.
The same consistency applies to traders, as well. Please review Rules #6 and #20. I have not changed my trading methodology and execution strategy in 20 years. I guess I’m the bricklayer.
#23 DON’T OVER-ANALYZE. DON’T PROCRASTINATE. DON’T HESITATE. IF YOU DO, YOU WILL LOSE.
I can’t tell you how many times traders have come into my office terribly depressed because they “knew” the market was going one way or another; however, they failed to put a position on. When I ask them why they did not put the trade on, their responses are always the same: they did not want to chase the market. They were waiting to be filled at the absolute best possible price (and never got filled), or only two out of three of their market indicators were present and they were waiting on the third.
The net result of all this procrastination and hesitation is the trader was correct in deducing market direction but his profit on the trade was zero. We don’t get paid in this business unless we put the trade on. Don’t over-analyze the trade. Place the trade then manage it. If you’re wrong, get out. But you’ll never be right unless you actually make the trade.
#24 ALL TRADERS ARE CREATED EQUAL IN THE EYES OF THE MARKET.
We all start out the day the same. We all start out at zero. Once the bell rings and trading begins, it’s how we conduct ourselves from a behavioral standpoint that will dictate whether or not we will make money on the day. If you follow the 25 RULES, you should do well. If you do not, you will do poorly.
#25 IT’S THE MARKET ITSELF THAT WIELDS THE ULTIMATE SCALE OF JUSTICE.
The market moves wherever it wants to go. It does not care about you or me. It does not play favorites. It does not discriminate. It does not intentionally harm any one individual. The market is always right.
You must learn to respect the market. The market will mercilessly punish you if you do not play by the RULES. Learn to condition yourself to play by the 25 Rules of Trading Discipline and you will be rewarded.