Lessons From the Pros

Lessons From the Pros is Online Trading Academy’s award winning e-Newsletter that contains powerful trading lessons and real-world examples of our simple, rule-based strategies in action. The newsletter is designed for the complete, well-rounded trader (and those who aspire to this level) who looks at trading opportunities across all asset classes including stocks, options, Forex, futures, real estate and more. This complete look across multiple trading instruments gives traders a much more comprehensive view of opportunities in the markets. Specialty skills, such trader’s psychology are also covered.

The lessons are covered on weekly basis. I will be adding the lessons from January 2012 onwards.

I often talk and write about “Market Timing” but why is it so important? The main reason you would want to know how to time the markets turning points in advance is to attain the lowest risk, highest reward, and highest probability entry into a position in the market. Think about it, by entering as close to the turn in price as possible, you enjoy three key factors:
1) Low Risk: Entering at or close to the turn in price means you are entering a position in the market very close to your protective stop. This allows for maximum position size while not risking more than you are willing to lose. The further you enter the market away from the turn in price, the more you will have to reduce position size to keep risk in line.
2) High Reward (profit margin): Similar to number one above, the closer your entry is to the turn in price, the greater your profit margin. The further you enter into the market from the turn in price, the more you are reducing your profit.
3) High Probability: Proper Market Timing means knowing where the real buyers and sellers are in a market. When you are buying where the major buy orders are in a market, that means you are buying from someone who is selling where the major buy orders are in the market and that is a very novice mistake. When you trade with a novice, the odds are stacked in your favor.
So how do we time the markets turning points in advance? It all begins and ends with understanding how to properly quantify real supply and demand in any and all markets. Once you can do that, you are able to identify where supply and demand is most out of balance and this is where price turns. Once price changes direction, where will it move to? Price moves to and from the significant buy (demand) and sell (supply) orders in a market. So, again, once you know how to quantify and identify real supply and demand in a market, you can time the markets turning points in advance, with a high degree of accuracy. To better understand how to do this, let’s take a look at a recent trading opportunity that was identified on December 5th in our online graduate program, the Extended Learning Track (XLT). The XLT is a two hour live trading session with our students three to four times a week. During the session shown below, our lead XLT trading instructor Sam Evans identified an area of Supply noted with the two purple lines on the chart. These two lines create a “sell zone”, allowing us to apply our simple rules for entering a position. This was an area of supply for a few reasons. First, notice the strong decline in price from the origin of that decline (the supply level). Also, notice that price declines a significant distance before beginning to rally back to the supply level. These two factors tell us that supply greatly exceeds demand at this level. The fact that price declines a significant distance from that level before returning back to the level clearly shows us what our initial profit margin (profit zone) is. These are two of many “Odds Enhancers” we teach in our graduate program. They help us quantify the real supply and demand in a market, which is the key to knowing where the significant buy and sell orders are in a market. The plan with this trade was to sell short if and when price rallied back to that area of supply. This trade was high probability but how do we know that? Well, being very sure that there is significant supply at that level, this tells us that we will be selling to a buyer who is buying at a price level where supply exceeds demand. Buying after a rally in price and at a price level where supply exceeds demand is the most novice move a trader can take. They are buying with the odds stacked against them which means they are stacked in the seller’s favor like our XLT members in this example.



Figure 1
As you can see below, what happens next is price rallies up to our pre-determined supply level where XLT members sell to buyers who are paying extreme “retail” prices. They are buying after that big rally in price and into that price level where supply exceeds demand

Notice that there is a small time frame uptrend that brings price up to our supply level and that price is above key moving averages when we sell short. Every trading book would say we are breaking the most important rules in trading by selling short under those circumstances. Well, how many people do you know who read trading books that make a consistent low risk living year after year? I would be surprised if you knew one so don’t believe everything you read. The trading book version is conventional thinking which has you buying high and selling low, so be careful. Don’t take my word for it however, read a trading book and ask yourself if how that book is teaching you to buy and sell in markets is the same as how you make money buying and selling anything. If there is any difference, good luck trying to profit from the information. Like anything in life, there is the book version way of learning to do something and the real world way. All we are doing at Online Trading Academy is simply sharing the real world way with you. We are not trying to reinvent the wheel. How you make money buying and selling anything in life is exactly how you make money buying and selling in markets.

Figure 3
Shortly after selling short in the XLT, price declined and met the profit targets shown on the chart. This is market timing and while it does not guarantee that each trade will be a profitable trade, it does offer the lowest risk entry, highest reward with that entry, and highest probability of success. How well your winning percentage is with the strategy depends on your ability to identify key supply and demand levels.
I sometimes hear people say, “I am only trying to catch the middle of the move.” They are trend followers and say that as if doing that is somehow easier. If price is already moving higher, for example, and you want to buy, where do you enter, where is your protective stop, and so on… I would argue that catching the middle of a move and making a consistent low risk living is harder than proper market timing. I am not suggesting the trend is not important. I just want to be in the market well before the trend is underway. Another thing I hear people say so often is this: “I wish I knew where the institutions were buying and selling.” Every time I hear this I say: “You can see where they are buying and selling, if you know what to look for.” It all comes down to supply and demand, just like buying and selling anything else in life.
Have a great day.

- Sam Seiden

Firstly let me begin this week’s article by wishing everyone of our Lessons from the Pros readers a very Happy and Prosperous New Year for 2012. For some this is a little bit of a downbeat time, as the blues creep in after the festive celebrations. But if you are anything like me, I am always invigorated and fired up for the challenges of the year ahead. With this in mind, I believe that the holiday season and start of each and every New Year is one of the very best times for traders of all levels to take stock, revisit their trading plan, and make sure that they are doing everything that they should be doing in their speculative activities. Maybe even going over that all important trading plan could be a good idea or just setting up a few new rules to keep you on the straight and narrow?
Whatever you decide that you need to work on, just make sure that you take the time to do it as thoroughly as you can. Don’t do for the sake of doing it, but rather because you need to do it to improve your overall trading results. Now with this topic in mind, I thought that this would be an ideal time to publicly answer some of the most important and frequent questions I have been sent during 2011.
Hello Sam and thanks for the regular articles. I find them really helpful as a newbie FX trader. I have often read about or heard you mention in your articles about Risk Management and how important it is in trading. Is this just to do with setting a stop loss or is there more to it than that? Thanks in advance – Sian P, Dagenham, UK
Hi Sian and thanks for the question. For me and my students of Online Trading Academy, Risk Management skills are probably the most important and fundamental of the tools applicable to consistently profitable trading. If you can’t hope to protect your account then how can you ever hope to grow it, as this obviously takes money in the first place and if you wipe out your cash then what do you have left to trade with? As you rightly say, setting a stop loss is vital during trading as this will protect your account from damaging losses and the order will limit the loss to just a small pre-determined percentage of your account balance. However, risk management also extends to when and where you take a trade. I like to look for only the best trades the market has to offer with the lowest risks and the highest potential rewards on the table. We can also include the actual currency pair we trade as part of our risk parameters. A little tip I give to my students is to keep an eye on the spread of various currency pairs. The greater the spread, the greater the level of volatility most of the time, so this will give traders an objective idea of what to expect before they even enter a trade.
Dear Sam, what would you say is the simplest and most practical use of the Dollar Index and why is it important to FX traders? All the best – Graham A, Orlando, Florida
Well Graham, I think that if used correctly the Dollar Index can be one of the most powerful tools in the complete trader’s toolkit. Firstly we should understand that the Dollar Index is basically a measure of the overall strength of the US Dollar against a basket of other currencies, namely the Euro, British Pound, Japanese Yen, Canadian Dollar, Swiss Franc and Swedish Krona. I like to look at it as a chart just like any other currency pair or tradable asset. For example:

http://www.tradingacademy.com/lesson...rt20120103.jpg Figure 1

As we can see from the above chart of the Dollar Index, it looks like any other price chart and we can plot areas of support (Demand) and resistance (Supply) like anything else. Knowing then that this chart is in its simplest form just a chart of overall Dollar strength or weakness, we can use this to help us to select an ideal currency pair to trade. For example, if the Dollar Index is reaching a level of support or demand then this is telling us that it would be a low risk buying opportunity for the US Dollar. We could then look to short the weakest currency against the Buck to stack the odds further in our favor or trade one of the other majors like the EURUSD, USDCAD, AUDUSD or GBPUSD. In the ongoing FX XLT online program, we always look to the Dollar Index before checking out any other currency pairs of trades, so as to get a good feel for the kind of opportunities we will find on other currency markets. It is a key part of the trading routine.
Sam I have read time and time again that the highest probability trades we can find are those that follow the overall trend yet I have seen many examples where trades you have shown look like counter-trend trades. How do you define the difference? Many thanks – Bobby R, Detroit
Hello Bobby. This is one of the most common yet important questions I have been asked by so many traders that I have pretty much forgotten how many times it has been asked! To keep things simple in my answer I would clearly say that I am always looking to trade with the trend one of two ways: With the current trend I can see before me, or when I am trying to take a low risk entry into the market in anticipation of the next trend about to develop. I accept that as a trader I will never know exactly when a trend is likely to end or change direction, but I can use a simple set of objective analytical trading rules to read my price charts and make a decision based on logic. My advice when trading is to look to the chart and ask yourself the following questions: Is there a trend and if so, how do you define it? If there is a trend, then how long does it potentially have left to run? Is it showing strength (higher highs and higher lows) or weakness (lower lows and lower highs)? If looking strong then go with it and if looking weak then look for the reversal trade with a good quality Supply or Demand level. Never just take a counter-move for the sake of it, however; always have a reason for taking any kind of action in the market and follow your rules for execution and risk management at all times.
Hello Sam. I understand that one of the single biggest advantages of FOREX trading is the fact that it is open 24hrs a day. I like this as it means that I can trade around my full-time job. What would you say is the best time for me to trade FX during the day, as I am based on the West Coast of America? Thanks Sam – Andy D, California
I would agree that one of the most attractive aspects of the FX market is the fact that it is open for so long throughout the week, pretty much from the Sunday open through to the Friday close. I would suggest in the early days of your trading to avoid holding trades over the weekend close, as this is when major gaps in the market can happen to you and for a newer trader this can be potentially damaging if they are unaware of the risks involved and should be built up to gradually. However if the plan is to do a little intraday trading then it is about picking the most active and liquid sessions to trade. While the hours may not be ideal to you considering the fact that you are on the Pacific Coast, the overlap between the Tokyo Close and the European market open is a great time to trade, which works out around Midnight to 3am PST or 3am to 6am EST (8am to 11am GMT). The quietest hours are typically around the US market close until the aforementioned open of Europe. Liquidity usually dries up, offering few decent trading opportunities and low volatility.
Once again I would like to thank you all for you questions and I try to answer as many as time allows. Thanks as always for your continued support and good luck in your trades.
Wishing you all a very Happy New Year,
Sam Evans

Before you know it, we will be celebrating a new year. It is traditionally a time for reflection and resolutions. This makes it a great opportunity to initiate real change in what you are doing in order to go to the next level in your trading and your life. Change is ubiquitous. As we look at change it becomes apparent that we must identify what kind of change we’re talking about. Change comes in all forms as in, a change in residence, a change in relationships, a change in body size, changes in health, changes in finances, changes in vocations, changes in trading strategies – styles – goals – and markets. Additionally, as time goes forward, we notice changes in our surroundings, changes in the community, changes in products and services, changes in demographics, changes in laws, and changes in the culture. Furthermore, as we view change it is also ostensible that we are always changing as well, either moving forward or going backward; nobody stands still – even though it may feel that way. Another point that is important to consider about change is that since it is ever-present, you’ll want to design your change; that is, design your growth. Someone once said of institutions (private or public), “If the rate of change outside of your organization is greater than the rate of change inside your organization, then the end is in sight.” This can be applied to you and me. As we look at change, it is also essential to reflect on the “rate of change” as it is one of the most impactful variables affecting you. Most people make more decisions affecting their lives in one year than their grandparents did in an entire lifetime. One thing to keep in mind is that to be deliberate about how we are changing is to exercise some control over what happens to us. Let’s look at a few of the concepts and principles of change and how to apply them to help you improve your sense of control and wellbeing.

 

1. Recognize that change is not an option. As stated in the above, change is ubiquitous…it is always
   happening in you, to you and around you.
2. Those who succeed and live fulfilling lives embrace change through personal leadership. They are
   deliberate about how and in what ways they are changing (growing). They have accepted responsibility
   for the results of their trading and their lives and hold themselves accountable. They practice
   methods, techniques, tools and strategies to handle their growth and development and to get a grip on
   things that they cannot slow or predict.
3. You must recognize that skill-building is a necessary companion to not only your trading but your
   living. Skills are not innate. Even if you are fortunate to be born with talent, that talent must
   be honed, developed and expanded through skill-building. As you gain competence in your ability to
   manage the variables of your life, you will gain confidence along with a positive attitude in general
   that will serve you greatly.
4. Focus on your choices. You can either be a victor as you manage your thoughts, emotions, and behaviors
   or you can be a victim, falling prey to the whims of change. You must choose to be a leader and create
   your destiny. Take the time to assess your values and beliefs, then set daily, weekly, monthly and
   yearly goals to secure your path to success.
5. Be aware of what drives change.
   1. The information explosion is a critical factor in the increase of the rate of change. It is
      estimated that the total accumulated knowledge of the planet is doubling every 2 to 3 years.
      This means that you must also increase your knowledge each year in order to remain competitive
      in the markets.
   2. The technology eruption accompanies the information explosion and powers the rate of knowledge
      growth. Just think of your present trading platform and the number of new software changes
      that are making it both easier and in many ways more complex to use them.
   3. Competition coupled with the globalization of the knowledge and technology blast means that you
      must continually hone your skills and increase your own knowledge in order to be competitive.

6. Be flexible. Your ability to accept, adjust, and respond is imperative to your ability to remain ahead
   of the curve. You must be adaptable to change and, as well, realize and recognize that your growth is a
   process, and sometimes you must slow down to speed up. Your mistakes and your failures are lessons
   and opportunities.
7. Use appreciative inquiry to continually question your choices. For example: Knowing what I know now,
   are there any decisions that I’ve made that I wouldn’t make over again if I had it to do again? Are there
   any trade strategies knowing what I know now that I wouldn’t get into? If you find through inquiry that you
   have embarked on a path that is not serving you then you may ask: How do I get out of this situation and
   how fast? As you use these and other questions like them, you will re-evaluate your positions,
   markets, relationships, and protocols. Remember, whatever has gotten you where you are today is not
   enough to keep you there. Getting outside of your comfort zone is a requirement for growth.
8. Continually increase your self-awareness. It is imperative as you move forward to become aware of
   your improvables and your issues in order for you to successfully address them.
9. Remember that challenges are opportunities. Change can be your friend, even those changes that are
   stressful. You are built for adaptation and growth. This comes about as you both challenge yourself
   and are accepting of the challenges you are met with in life.
10. Be proactive in ways that will keep you poised to deal with challenges and preemptive as you anticipate
    what can go wrong and avert the issue whenever possible. As you grow in knowledge and skill, be sure to
    practice the tools and techniques that you have learned, early and often, in order to take control of
    your development as a trader and as a human being.

As the New Year comes, position yourself to burst on the New Year scene with a newly crafted resolve to hone your A-Game. Your trading is a reflection of your life. If you can’t keep commitments in your life, how can you expect to keep commitments in your trading? In other words, process mastery is not just for your trading. Set your sights for a new resolve in the New Year as you affirm to master your mental game.
May the New Year bring prosperity, joy, love, peace and happiness to you and yours,


- Woody Johnson

This is always a hot topic and one I have plenty of experience with and have written about before. A couple of months ago, I spent some time in London with some of our graduates of our Extended Learning Track (XLT) program. I had a conversation with one woman who I have met before in our program. She was still kind of new to trading, but seemed to be doing well and had a very positive attitude. This last visit, I also met her husband who I really enjoyed speaking with – very nice and funny gentleman. During the conversation, the three of us shared a laugh when I asked if he did any trading. As soon as I asked that question, they both started laughing because as he said, “I wouldn’t dare be a trader; trading is her thing.” What he was pointing out to me was that all the challenges that come with trading are not for him and that she was much more able to deal with them. He talked about trading as if we were talking about seeing a scary movie or something. Anyway, she sent me an email shortly after with statements attached. Below is that email and my thoughts on why she is likely to do very well.
Hi Sam,
Hope you are well and enjoyed your visit to London. It was nice to have met you again!
As promised, I am sending you my TradeStation 25.10.2011 trading statement from RJO for your interest. I did two trades on that day and they are as follows:
Trade 1: Entry 9:08 am @ $1660.60 Exit 11:45 am @ $1664.10 with profit $350.00
Trade 2: Entry 12:08 pm @ $1663.80 Exit 4:52 pm @ $1698.80 with profit $3500.00 (targeted price!)
Total Gross Profit for the day: $3850
May you all have a Happy Christmas and a Successful and Profitable 2012! See you in the new year! FYI: I am attending Steve Beaumont’s Platform Immersion class tomorrow and will attend Jose’s Options class in December. Thanks for your recommendation in signing up the Diamond pass and I enjoy learning all the asset classes!
Best Regards,
Fiona
One fascinating realization I have come across during my years as a trader, private trading coach, author, and now Vice President of Education for Online Trading Academy, is how different female and male traders can approach, analyze and trade the markets. Without offering outrageous generalizations, it has been my experience that women possess a particularly logical mindset that can give them a substantial advantage in market speculating. Simply, the trading method I developed and use quantifies the supply/demand and human behavior relationship that ultimately determines price in any market. It is based on a very objective and mechanical set of criteria. In other words, the goal is to learn the strategy and then simply follow the rules. The female mind has a much easier time doing this than the male mind. Here is an example of how this works. I recommended a trading idea to buy a stock at a certain price based on anticipatory analysis with the strategy. One of my female students took the trade and did well with it, while a male saw the trade, but did not enter it. I had discussions with the two of them and the conversations were truly fascinating – how could two human sets of eyes look at the exact same chart, be told exactly the same thing to do, and yet, treat the trading opportunity so very differently? For privacy purposes, we’ll call them Lucy Logic and Eddy Emotion. So, here’s the scenario: The stock had been declining to an area of support (demand) from where it had recently rallied. Eddy quickly asked me what I thought of the opportunity, and Lucy did not. Eddy then asked if I thought the support (demand) level would hold and produce a reversal, or would prices decline through it? Lucy would never consider asking that question with any trading opportunity because she knows it’s a waste of time. Eddy doesn’t feel the same way. But let’s face it – no one on earth knows for sure if the demand will hold for certain (just like a bet in Vegas). All we can do is properly assess the odds and risk (just like Vegas does). If the odds are stacked in our favor and the risk is acceptable, we take the trade (this is how Vegas makes a fortune). When the trade was nearing our entry level, Eddy abandoned the strategy rules and gave in to emotions that still control his decision-making process today. Lucy remained logical and objective. Instead of worrying about what may or may not happen at demand, she explained to me why a high odds/low risk trading opportunity was at hand. She said that sellers were now selling after a multi-day decline and into an area of support (demand), exactly where the consistently profitable trader would be buying, not selling. When her entry price was reached, she took the trade with a low risk stop in place and an objective target identified. She ended up profiting nicely on the trade and Eddy never entered the position!
How can we all benefit from this information? It is clear to me that females, in general, don’t worry all that much about things that are not in their control, and this allows them to naturally focus on the objective information (what is real), which is key in successful trading. In trading, it is the objective and logical mindset that gets paid from the subjective emotional mindset. I have found that the difference between mindsets is most evident at a specific time. When a trading opportunity arises and it is time to take action, the female mindset tends naturally to execute the trade that has been planned out. At the same precise time, the male mindset tends to drift to subjective and emotional thought, which can lead to trouble. It appears that, again generally, the female mind has the naturally logical mindset needed to understand the material quickly, whereas the male mindset has difficulty keeping things simple, naturally trying to complicate the process. An example would be to constantly add subjective indicators and oscillators that can lead to trouble for any trader. What validated my thoughts on this topic are what my female students and other successful male traders out there have in common. Each of them share two common traits. First, they realize the power of human emotion and that a trading plan absolutely must be followed. Second, the successful male students I have worked with have the ability to not let subjective information enter into their brains. It is almost as if they have a special filtering process going on when they read trading books, take seminars and courses. In other words, successful male traders succeed with tools a female brain naturally possesses.
From my experience, men tend to be focused on trying to predict the future whereas a woman uses simple logic to consistently make the correct choice. They have the natural ability to keep things objective, simple and logical. The man tends to have trouble in these areas, which can make trading for him more difficult than it has to be. This is no different than how men and women make choices in other parts of life outside of trading. Though trading is still a career dominated by men, I would expect this to change in the near future for a few reasons. First, the barrier to entry is not what it was years ago. Second, from my experience, the female mindset is likely to last longer in a trading career than a male mindset, as a woman’s mindset is much more suited for the challenging task of consistently profitable trading.
Have a great day.

- Sam Seiden

By Brandon Wendell

A student recently emailed me to ask if I knew of an indicator or tool that could identify high quality trading environments versus choppy, unpredictable ones. Such an indicator would be valuable since many traders tend to overtrade when the markets become volatile and choppy. What do I mean by choppy? Well, it would be a trendless environment where sharp, fast movements in both directions are present. It is where it seems difficult, if not impossible, to identify the potential direction of price movement, and it is what we have been experiencing in the markets a lot recently.
Unfortunately, I do not know of a chop and slop indicator. However, when we are looking to trade, we want to focus on proper entries at supply and demand zones and trade in the direction of the dominant trend. Perhaps a trend indicator such as a moving average could be of use to identify when trading should be okay and when we would be best to stay out of the markets.
A moving average is a summary of the previous closing prices and an indication of the prevailing trend. When that average is sloping upward, then the average closes were higher and the trend is presumed to be up. When the average is pointed downward, then the trend is bearish and shorting positions should be looked at. If the average is moving sideways, then the security is trendless and should be avoided for trading purposes.

http://www.tradingacademy.com/lesson...t20120110a.jpg
Figure 1

To make a chop and slop indicator, you need to set a rule based on past performance of price versus a moving average. Watch how price performed during previous bullish, bearish, and trendless periods. You could set a rule that if price closes above the moving average for X periods, then you are in a bullish trend and should focus on buying. If the price is closing below the average, then you are likely to profit by shorting. A choppy environment would be indicated by a number of crossings of price over the moving average within a certain time frame. You would have to experiment on your own to determine the minimum number of crossings.

http://www.tradingacademy.com/lesson...t20120110b.jpg
Figure 2

The drawback to using the moving average on the time frame in which you are trading is that it is a lagging indicator. You would not see a bullish trend signaled by the indicator until after you left the demand zone and the optimal entry point for your trade. Similarly, a bearish trend would also be noted by the moving average well after leaving the best entry for a short at the supply zone.
So, how can we use these moving averages in our trading if they are lagging? We can apply them to the larger time frame that will influence the one we are trading on. In previous articles, “Proper Perspective” and “Proper Perspective Part 2,” I discussed the need to view larger time frames so that we can ensure that we are trading in the direction that has the highest probability for success.
There is no perfect moving average to use for all securities. There are some more popular ones that can be used, or you can experiment with different ones to see which ones work best for your trading. If I am looking to trade intraday on a five minute chart, then I can apply a moving average to the 30 minute chart to see what the dominant trend is. If price is rising above an upward sloping moving average, then the trend is bullish and looking for long positions on pullbacks to demand in the five minute chart would be best.

http://www.tradingacademy.com/lesson...t20120110c.jpg
Figure 3

If the 30 minute is down based on falling prices and a declining moving average, then shorting rallies to supply in the five minute time frame has better chances for success. But if price on the 30 minute chart is slashing back and forth through the moving average, then there is not a dominant trend for the smaller time frames to follow and you are likely to see chop and slop.
We still enter at supply and demand for our trading and should not deviate from that. But trading with the dominant trend is something that should protect our capital by filtering out unnecessary trades that cost money and commissions. We want to trade safely at all times and give ourselves the best chance for success.

- Brandon Wendell

By Rick Wright
Ugh, hello traders. Another year, another beat down coming from these darn markets. I can’t believe I’m still trying to trade and make money when everything and everyone is out there trying to take my hard-earned cash. Every time I think I’ve found the next great trading strategy that someone showed me – either on the internet chat forums or at a trading club I belong to, or in the two dozen trading books I picked up over the year, or the five trading magazines I subscribe to – the darn system doesn’t work. I mean, I’ve tried that moving average crossover technique four or five times; that was worthless. Then I tried that Fibonacci style; that didn’t work on those three trades. Ha, then there was that overbought/oversold on the Moving Average Convergence/Divergence; that lost me money on all three trades as well. Wow, there were dozens of techniques I tried and none of them seemed to work on the few trades I tried them with. Could it be me? I must not be cut out for trading.
I know I can read basic supply and demand charts; those are pretty simple to understand, but my trading style isn’t working. I mean, I tried scalping (trading dozens of times a week); that lasted a whole five days. Then I tried intraday momentum trading (placing just a few trades a week); the market didn’t do anything that week so that didn’t work. Then I tried swing trading (holding on for a few days at a time); not bad, but look how much money I could have made if I was more active! Lastly, I tried long-term trading (holding on for weeks at a time, with only a couple trades a month); it was sooo boring – I couldn’t stand to wait around for the right setups! Plus, that month the market was kind of flat; I wouldn’t have made any money then anyway!
Maybe it’s the brokerage firms I’ve tried! Yeah, that’s it! I’ve heard that they run stop loss orders; that must be why I’m losing money! All I have to do is find the one honest firm out there and suddenly, it will be raining money on me! Now, which broker should I switch to this month? Now, I’ll have to do some more research; maybe one of the hundreds of websites out there will tell me who is honest. Darn, who owns this particular website? Can’t seem to figure out who pays the bills on here; wonder if it’s the brokerage firm who ranks at the top in all of their rankings? Ugh, who can I trust out there?
I wonder if I used more leverage I could make more money? That’s it! I’m being hindered by the conservative leverage my firm allows me! I know they offer 20 to 50 times my money; if I just trade larger position sizes, I could make up for those bad trades and then make some serious coin! Perhaps one of those overseas firms will let me trade with 400:1 leverage! That will really get my portfolio going!
Perhaps it is my computer! I’ve had this desktop for two years now; it must be a dinosaur! Or maybe I need that superfast internet speed my cousin has! You can’t trade with only 6 Mbps; maybe I need 20! Or 50! Now if I could just get all of these things straight, the market will give me my money back!
Whew, that was difficult to write. Shake it off! Let’s try that again.
Hello traders! I don’t know about you, but I am excited about trading in 2012! I am thrilled to get back to trading after a couple of weeks off over the holidays because I know exactly what I am looking for in the markets. I have four trading techniques that I use on my specific time frames that fit my lifestyle and time frame I prefer to be in the markets. When my specific parameters show up, I’ll take my trades without hesitation.
How on earth could I know what has worked for me in the past? I tried them and kept track of them. How many times? Each technique should be attempted at least 30 times to give you a statistically relevant sample – and I recommend trying anything new on paper or the demo account, then with small position size after you become good/profitable with that technique. Three tries isn’t enough! What should you keep track of? Read this article for a brief list:
What is your Favorite Pizza?
Having a positive attitude in things that you do will lead to more positive outcomes. This is true in nearly everything in life, don’t you think? How many negative people do you know who attract negative outcomes, or always look on the gloomy side of things? Those people are fun to hang out with, aren’t they? By having a more positive outlook on trading and life in general, more positive things will come your way. As we often say at Online Trading Academy, trading is simple, just not easy. How many potentially six or seven figure jobs out there are easy? Not too many, I imagine. Have you ever seen a good golfer on the course play and shoot close to par, or even break it? Do you think he or she got that good by luck and being negative? Of course not! Hours of practice, and visualizing every shot the way they WANT the ball to go is how they play. This is the major difference between decent golfers and the great ones. Do you want to be a decent trader, or a great one? By having the discipline to keep track of the things you are good at and the patience to wait for those setups to happen will make trading simple for you!
I hope everyone out there has a great year of trading in 2012, and I hope to see you in class when I’m in the neighborhood!

-Rick Wright

In all of our OTA courses, regardless of which asset class, we teach the importance of record keeping. For those faithful enough to do this, after several years of trading and recording both winners and losers, you will have a valuable bank of data. Based on that data bank, a trader could make some very interesting observations about the market as well as about one’s performance, such as in which quarter over the years does a trader tend to perform the best and which quarter the worst. This kind of scrutiny can also be done with a monthly or even a weekly focus rather than just quarterly.
One particularly interesting thing I have observed in my trading during that low volume week between Christmas and New Years is as follows. The Bear Call (short vertical) tends to work almost impeccably within that specific week. Without giving too many statistics, I will focus on some facts which might be quite revealing. For those traders who do want to know what exact strike prices for a Bear Call that I have selected in the past, I suggest reading this previous article.
Gathering the facts could be quite easy if one utilizes TradeStation. On TS under the Insert Tab, when on the Chart Analysis window, we can select the functionality “Paint Bar.” From all the choices given by Paint Bar we can specifically select “First Bar of Year.” The chart below shows the daily chart of IWM with the painted pink bars being the first trading session of the year. Whereas the focus of this article is on that low-volume-week between Christmas and New Year; notice the yellow oval on the volume for the last five daily trading sessions of each year.

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Figure 1: IWM Daily

Anyone using Technical Analysis should be able to verify the accuracy of the facts listed in the table below.

Date & Year
Price Outcome for the IWM
Fri Dec 31, 2010
Down
Thurs Dec 31, 2009
Down
Wed Dec 31, 2008
Up
Mon Dec 31, 2007
Down
Fri Dec 29, 2006
Down
Fri Dec 30, 2005
Down
Fri Dec 31, 2004
Down
Wed Dec 31, 2003
Down
Tues Dec 31, 2002
Down
Mon Dec 31, 2001
Down

Figure 2

Basically between 2001 and 2010, the IWM on the last trading session was down or a red bar nine out of ten times; the only exception being 2008, which was an abnormal year due to the subprime crash. This means that on the last day of the year, we should not be getting long, short-term. I shall come back, in a moment, to what this insight means for us option traders.
However, if on the chart the time interval gets changed from daily bars to weekly, the Paint Bar functionality will still show in pink the first (weekly) bar of the year, while the bar before would be “that low-volume-week between Christmas and New Year.” In this case statistical data can be pulled out again and observed that a majority of the time the weekly bar of the last week of the year tends to end up red.

Year
Action
2010
Up
2009

2008

2007

2006
Up
2005

2004

2003
Up
2002

2001
Up

Figure 3

Six out of the 10 years the weekly bars were red. The years on which the weekly bars, on the IWM, were green are listed above. Just because those were green bars does not mean that short verticals would have been an incorrect strategy. The next valid point to be made is that a Bear Call should be done based on Technical Analysis and the sold leg should be above resistance, which means that we should be selling an OTM leg. (The article referenced above, however, involved a Bear Call that had sold an ATM leg, which is somewhat aggressive.)
For instance on the current daily chart of the IWM resistance is below 76; hence the sale of a 76 call could be done and then the purchase of a higher leg would be technically supported. Assuming that at the end of the year there tends to be a drop, it would be reasonable to expect that the 76 level of resistance will not be easily broken. On the ES that level of resistance is 1260 to 1266; on the OEX and XEO it would be 575. All the majors are facing similar levels, and building on the previous observation that the volume is low, the bearish bet sounds logical.
It is beyond the scope of this article to elaborate on the extent of the drop, yet a valid assumption is made that historically there tends to be a pull back. In the case of this year, 2011, an IWM Bear Call with a sold 76 call and protection with a higher strike price, the price action that is expected at the close of Friday Dec 30 this year would be lower than 76 – period. How much lower, is truly irrelevant because the payout is the same. The payout truly depends on where the Bear Call entry was made.
In the second day of our Professional Trader course we teach three possible short entries. The Figure below is taken straight out of the manual, Day 2 slide 88. Only some minor modifications are made.

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Figure 4:

The first entry (#1) is considered the most aggressive one because there is no confirmation that the price action will indeed turn around and head lower. In such case the risk is greater which is disadvantageous to us. The second short entry (#2) which is entered after price is no longer rapidly climbing up into resistance but is slowing down. On the charts this would be represented by multiple dojis (which is very much what the IWM is currently doing on 12/26/2011). The #2 entry is considered moderately risky, while the third (#3) is the conservative entry. However, if we wait for the #3 entry, especially when selling short verticals, we might have already missed the rich premium that was there when there was less certainty. Due to that uncertainty, think of it as volatility, the premium was juicier.
Although a Pro-Trader short entry could be used when trading options, a trader needs to be aware of the inner workings of the option premium. There are three Greeks that we need to keep in mind: the Delta (intrinsic value and direction), Theta (time until the expiry), and Vega (volatility of both overall market and the individual underlying). The short entries #1 and #2 are superior to #3 for a Bear Call with less than a week until the expiry. In conclusion, a trader may want to revisit this article just before Christmas next year and review whether or not to add this end of year strategy to their trading arsenal. Have green trading and a Happy New Year.


- Josip Causic

By Gabe Velazquez

I believe that a prime ingredient for success in any endeavor is the right motivation. One question I like to ask new students early on in class is why they want to trade. This question is very important because so many people fail in this business partly because they lack the drive to persist through the inevitable tough times that are derived from trading.
The obvious answer to this question of why someone would want to trade is to make a lot of money. My experience with traders that focus all their attention on money, however, is that their drive to make money causes them to be lax in their risk management principles. They cling to their losers in an effort to avoid them because profits will only come by holding on long enough for the trade to work; or so they think. This attitude will no doubt have devastating consequences to their trading accounts over time, and many will wash out before they learn that focusing too much on money is not the answer.
My view is that rather than paying attention to the money aspect of trading (which is good, please don’t misunderstand), we should center on what the monetary rewards of successful trading can bring us. These are different for everyone. For some, it may mean not being beholden to any one person or corporation for their livelihood, and that translates into freedom. This may mean time with family, friends, or simply doing things that we enjoy. For others, it may be sending their kids to a good school, or perhaps, traveling the world. Philanthropy, giving something back, is always a fine motive.
A misguided notion about why people pursue a trading career is the belief that because there is no boss to report to, a trader can do as he or she pleases without being accountable. This cannot be further from the truth as successful trading can only be attained by hard work, diligently following rules, and often times, stepping outside of our comfort boundaries. When this reality finally sets in for traders, many will fall by the way side as the short-cuts and easy money schemes are quickly dispelled.
Profitable traders are very competitive individuals who also enjoy being challenged. And believe me when I tell you, being consistently profitable in trading will probably be one of the most challenging undertakings you will ever pursue. This has always been one of the allures of trading for me. Also, the fact that there are no limits in trading — in terms of the monetary gains possible — has a great appeal. Most jobs or careers have some type of limitations, but not so in the trading arena.
Another aspect that can motivate someone to start trading is the gambling component of speculating in the financial markets. This provides excitement to those that need the “action.” The thrill of a “big score” keeps these individuals funding their depleted futures accounts time and again until the trading capital simply runs out.
Here at Online Trading Academy, our motto is that we trade for a better life, not to make trading our life. This statement pretty much encapsulates all the good things trading can provide and what should be avoided.
So, what excites you? What gets you out of bed every morning? What activities do find joy in? What makes you happy? This is where true motivation comes from. Trading should be a means to an end. That end has to be individual, but it must be rooted in something pleasurable or else it won’t work.
Putting money at risk is not easy, but focusing on the reward can change the reasons you trade. So find your positive motivation, set some goals, build a road map to get you there, and go after it.
Until next time, I hope everyone has a great week.


- Gabe Velazquez

By Dr. Woody Johnson

Merriam-Webster’s Dictionary defines greed as simply, “… a selfish and excessive desire for more of something (as money) than is needed.” Greed is often referenced as one of the main contributors to trading loss. Greed mangles the mind by distracting the trader from what matters most in the trade, which is quite frankly, to protect your capital by prudent planning and following rules. It also distorts your judgment regarding high probability strategies and effective follow-through. Additionally, it is the other side of the fear coin; that is, greed can arguably be thought of as a fear of not having “enough.” Of course, having enough is a purely subjective notion, but for the reasonable person, someone who wants more, more, more, as in getting every cent in a move, or wanting more than one’s share, is considered “greedy.” Whether we’re talking about the fear of loss or the fear of not having enough, either way it is a very difficult emotional challenge to getting the trading results that you want. Now, the question is what do you do about those bouts with fear/greed that take your trading effectiveness south? The important thing, of course, is to manage your fear/greed one trade and one incident at a time.
Managing errant emotions is one of the most important trading skills that you can develop. Emotions are an inextricable part of being human and cannot be totally taken out of the trading equation. However, you wouldn’t “want” to take emotions out of your trading even if you could. Yes, negative emotions throw a monkey wrench into your process; for instance, anxiety, fear, greed, guilt, self-doubt, impatience, apathy, to name a few, are what mangle your thinking. But what is also true is that positive emotions support effective decision making and follow-through. Emotions like inspiration, determination, patience, confidence, curiosity, and the satisfaction of viewing your trade run its course successfully are highly supportive to effective follow-through. So, if you became actually emotionless, you would be divesting yourself of the power of positive emotions. This, of course, begs another question and that is, “How can I maintain more of my positive emotions?” Well, the first thing that you want to do is to monitor your thinking. What and how you think is where emotions begin. Look at it this way. If, during a trade, you tell yourself things like, “I don’t trade very well,” or, “This type of trade really turns against me,” or, “I’ll probably make a mistake on this trade,” then emotions of anxiety, trepidation, fear, and self-doubt, among others, are what follows. Emotions are connected to thoughts. If you think positive thoughts, then you will respond with an increase in positive emotions. On the other hand, if you think negative, power sucking thoughts, you will begin to feel in ways that are consistent with those negative thoughts. So, you must not only monitor your thoughts, you must change them when you become aware that they are negative. Changing negative thoughts can be challenging and difficult when you first begin the process, but if you remain diligent, you will begin to consistently reverse negative thinking.
Another thing that helps you to manage your emotions is to visualize or imagine an experience from your past where you felt uplifted, confident and inspired. These types of memories bring on positive emotional states. An emotional state is broader than a single emotion. For example, if you feel the emotion of anxiety, it involves just that feeling; however, if you are entangled in the “state” of anxiety, you will activate images that are anxiety producing – memories of times when you were anxious and various experiences involving anxiety. So, when you want to change your emotional states from negative to positive, you’ll want to not only track what you are thinking, you’ll want to change the pictures in your mind. Now, you might be saying to yourself that this is difficult. One thing you want to remember is that you are already doing this kind of thinking and visualizing. Humans think in words “and” pictures most of the time, they just aren’t aware of it. In fact, when you get consistent negative results, one of the things at play is “doom and gloom” visualizing, which is picturing all the ways that the trade will not go through.
So, the next time that you are feeling “greedy” or fearful, it is very important to take an active role in finding out what you are thinking in order to change negative, unsupportive thoughts to positive powerful thoughts. Then access and activate vivid memories of events in your life where you felt determined, inspired, confident, happy and uplifted. These are just a couple of ways to help yourself plan your trade, trade your plan and follow your rules so that you create consistent results in your trading process. Remember, the definition of effective trading is not solely connected to profit and loss, but to consistent execution. Profit that is not associated with a plan and follow-through of all of your rules is profit that is not helping you become a better trader. These and many other tools, techniques and concepts are what we teach in Mastering the Mental Game Online and On-location courses at Online Trading Academy. Ask your Online Trading Academy Education Counselor for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”
Happy Trading,


- Woody Johnson

By Sam Evans

If you have never put the term “Technical Trading Strategies” into a Google search, then I suggest you do it now before reading any further in this article. The reason behind this suggestion is that I would like you to see exactly why I preach about keeping trading as simple as possible. If you have yet to do the Google search I suggested, then let me save you the time and trouble and tell you that you will find literally hundreds of websites and postings on the internet right now, all with their own tips, ideas and tools to help you make money in the financial markets consistently. Let me say outright that by no means am I disputing whether or not these various strategies work or don’t work, as that is not the purpose of this article. However, I would instead like to talk you about why it is so very important in any discipline to learn and fully understand the core basics before attempting anything else.
In my experience, one of the most damaging things about looking on the internet for trading techniques and strategies is that it becomes very easy to confuse yourself if you don’t know what you don’t know, which in the case of most inexperienced traders is a core understanding of price action. I like to think about it in terms of sports. Take soccer, for example. You can have one or two star players who have an impressive ability to do magical things with the football and their footwork skills; however, this alone is not enough to consistently win games. There needs to be some kind of a formation played by the whole team at any given time, knowing when the best time to attack is, when to defend and when to wait for an opening. What good would the skills of your best passing player be if every time they put the ball in a solid place, there was never another member of their team to receive it? Trading is much the same way.
By just using a detailed technical strategy alone which relies on various price indicators for execution and analysis, there will always be the danger of overcomplicating the trading process. I like to think of such technical tools as the “skills” the soccer player adds to the understanding of the game. If you just practice kick-ups alone on the sideline, you are only then developing one specific skill and what use is the ability to do a hundred kick-ups on the actual playing field if you don’t understand the rest of the game? Likewise, as traders we need to understand the “game” itself, before we start to rely on the “skills” to win the match. A good striker only needs to be in the right place at the right time, with a sound kicking leg to score goals. A solid defender only needs to mark their man and tackle cleanly to cut off the opposition’s attack. Learn these fundamentals and do them well and you are already on your way to winning games. In the trading world, we also have the fundamentals which need to be understood and applied before anything else. We call it Support and Resistance.
One of the most important skills to develop in trading consistently is the ability to be able to make a decision objectively and unemotionally. We should never be in the situation whereby we are saying to ourselves, “I am buying this because it looks like it’s going up;” rather, we should always have a clear and functional reason to enter a trade that has been part of a disciplined and well-written trade plan. The more reasons a trader looks for to enter a position, the less likely they are to come to a quick and simple decision. Take a look at the chart below with a handful of Technical Indicators applied, like Momentum, Fibs and Bollinger Bands:

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Figure 1

I will admit that this does look pretty impressive to somebody looking for a deeper level of technical understanding in the markets, but we also need to ask ourselves what the purpose of each indicator is in this example. Yes, Bollinger Bands are a great way to assess price volatility and extensions and Fibs are a clear cut way to measure pullbacks in trends, but we also need to know exactly what we are looking for when we enter a trade. Are we trading trends, or are we trading reversals? Are we looking for volatility breakouts, or are we trading a chart pattern? You see the danger of creating an overcomplex strategy with an abundance of indicators, is that we need to know and understand clearly that each tool measures a different aspect of price behavior. Mixing and matching a whole variety of them is only going confuse the trader and hinder their ability to pull the trigger. It’s like having too many individually skilled players on the team, but with no team mentality!
On the other hand, we can start with the basics and build from there. At Online Trading Academy, we recognize that a simple rule-based strategy is always going to provide the most objective and unemotional path to consistency in the market. This is where price support and resistance builds the foundation of everything we should be doing. Let’s look at the same chart without any other tools applied:

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Figure 2

For a start, this is cleaner and what many traders usually forget is that there is plenty we can learn about price action from just studying the candles alone, but that is something for another article. What I have done in this example is to have just drawn a few areas of price support and price resistance. By doing this, we have not only simplified our choices of when to take action in the market, but we can also reduce our risk and increase our potential reward massively if we pick the right areas for our buying and selling opportunities. When you think about it, support and resistance offer the disciplined trader a unique chance to time the market with a decent degree of accuracy and provide a very objective price target at the same time. If you have been looking for the very best leading indicator, then you really need look no further.
Before confusing yourself with a plethora of fancy indicators and patterns, please consider my analogy of the soccer team. When applied correctly, support and resistance become the foundational tactic or formation of the strategy and can get the whole “team” working in the same way. Develop your core, then apply your specific skills and you will be amazed by the results I’m sure. Join me in two weeks for the second part of our exploration of the dynamics of Support and Resistance where, I will define why this simple analytical approach will always carry the greatest edge in trading and how we can then use our understanding to look for the ultimate imbalances in the Supply and Demand equation. See you in two weeks.
Take care,

Sam Evans

By Don Dawson

Trading can be as simple or complicated as we wish to make it. With all of the information available to traders today, it is very easy to complicate our trading. I would like to show you a relatively simple way to look at the E-mini S&P (ES) and determine if the market is currently trending or in a trading range.
When a trader approaches a market, one of the first things they should do is identify if the market is trending or trading in a sideways market. If you know which of these two modes the market is currently in, you will immediately know whether you want to be a buyer or seller in this market.
A tool that we can use to help determine the market condition is the $TICK indicator. The $TICK is an internal market breadth indicator that shows the number of stocks on the New York Stock Exchange (NYSE) that are either on an uptick or a downtick. There are approximately 3,300 stocks that trade on the NYSE. At any given time, each of these stocks are trading on an uptick, downtick or unchanged price. To get the value of the $TICK, we will need the sum of these 3,300 stocks TICK values. This value is figured by subtracting the number of stocks on downticks from the number of stocks on upticks. This value is updated approximately every 5 – 10 seconds on our chart packages.
There are many variables that would cause this number to be volatile. Imagine a buy or sell program that is trading 500 stocks at once. Once the program is executed, you would see the $TICK immediately show a 500 tick increase or decrease depending on if it was a buy or a sell program.
I would like to show you a way of smoothing this number out and charting the results so you can use the information for your trading.
The first thing we need is to create a 5 minute chart of the Regular Trading Hours (RTH) of the ES contract. The reason we need an RTH chart is because the stocks that make up the S&P Index do not trade at night. So that we can compare both markets together, we need to look at the RTH Futures. Then we can insert the $TICK chart above the ES chart as shown in Figure 1.

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Figure 1

Looking at the $TICK chart, we can see a black horizontal line across the chart. This is the zero line for the $TICK indicator. When the candles are trading above the zero line, this is telling us that there are more NYSE stocks on upticks than downticks. If the candles are trading below the zero line, we know that there are more NYSE stocks on downticks than upticks. Since there is so much volatility each trading day, we need a way of smoothing out this $TICK indicator. To do this, we create a simple moving average (SMA) of 20 periods. If we just look at the candles crossing the zero line all day, there is not much sense of direction. But if we look at our 20 sma (blue line), we see that the SMA has been staying above the zero line most of the day. This is an indication of a strong uptrend and we should be looking to buy this market when the ES prices retrace back to good demand levels. This would be reversed if we saw the 20 sma staying below the zero line; we would look to sell rallies into good supply levels.
Figure 2 will show us a day when the ES was in a trading range and we could tell because the 20 sma was trading on both sides of the zero line. Another clue to look for is how far away from the zero line does the 20 sma get? If the 20 sma is very close to the zero line all day, there is currently not much trend in the market.

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Figure 2

When the ES is showing a non-trending day, you can look to buy at demand levels and sell at supply levels. This type of market is known as channeling and allows traders to define extreme boundaries and trade from both the buy side and the sell side.
If you are a breakout style of trader, I would recommend that you look for days when the $TICK is showing signs of trend before you place a trade. If the market is channeling, then breakout trades will have a higher failure rate.
I would use the $TICK to trade the ES or the Dow Futures since the majority of their stocks trade on the NYSE. If you want to track the E-mini Nasdaq (NQ) market, then you can use the symbol $TICKQ.
The nice thing about using the $TICK indicator is it is as close to real time as you can get without much lag.
There are many other ways you can use $TICK to trade the markets, but I will leave that for some future articles. In the meantime, you should be able to determine if the ES is trending or not. Once you know this all you need to do is pick some supply/demand levels and buy or sell with the trend. If there is no trend, then set up some channel supply/demand levels and trade inside the channel. Buying the dips and selling the rallies is your best course for this type of day.
This week I have the honor of instructing a Futures class in Singapore and then doing a presentation at the Singapore Mercantile Exchange (SMX). With Australia being so close to provide natural resources and China and India nearby to provide so much demand, this region should do very well with the Commodity Futures markets. While I was doing a little sightseeing in Singapore, I could not help to notice how many tankers and other shipping vessels were anchored off the shore. This reminded me of how one could profit from the Commodity boom by doing some research on companies that transport Commodities around the world.
“Action is the foundational key to all success.” Pablo Picasso
It’s a trader’s paradise at the moment,
- Don Dawson

By Dr. Woody Johnson

Ralph looked on feeling anxious and tense as the price action inched toward his stop. He had drawn a supply zone on the ES E-mini 60 minute chart and had placed his stop 2 ticks above the top line of the zone. He told himself, “Oh, crap, it’s going to take me out.” He didn’t like being stopped out as he admitted to himself that, “Nobody does.” But he also reminded himself that, “I have the stop in to protect me and it is doing what it is designed to do…and that’s OK.” Just then he saw that his stop had been hit and he was out of the trade for a small loss. In the past, he would become so fearful of being stopped out that he would move his stop. This was a distinct violation of his rules. In fact, in the past, he would frequently move his stop several times and often be met with substantial losses, much to his dismay. When that happened, he would revenge trade almost immediately afterwards and end up with two major losses back-to-back. In these situations, he would become dejected, depressed and despondent. His subsequent trades also suffered as well due to the fact that he became thoroughly distracted by the negative emotions and would make additional mistakes, which cost him even more. He began to realize that this negative pattern would destroy his trading account if it continued. He knew he had to change. Ralph learned about the importance of documenting his trades; not just his planning and execution, which were his mechanical data, but he learned that he needed to track his “internal data,” his thoughts, emotions and behavior. He also learned that once he gained more awareness of the cause for this issue, that there were mental and emotional tools to help him make the changes in his thinking and feelings, which helped him immensely toward turning the corner on this negative pattern. Now, as he considered the results of his trade more closely, he recognized that he had traded his plan and kept all of his rules. His tension decreased and he felt much better about the fact that he had a “private victory,” meaning that he had resisted the temptation to violate his rule of not moving the stop, and therefore, had kept his commitment to himself. He then picked up his pen and wrote in his Thought Journal that he had successfully negotiated this trade even though he felt anxiety and tension pressuring him to move his stop.
Documenting the data of your trading is essential to success. Also, it’s of vital importance to track not only the “mechanical data,” i.e., the data of the actual trading execution (entry, targets, stops and exits), but you must track the “internal data” as well, i.e., what you are thinking, emotionally feeling, and the unconscious beliefs. Actually, the internal data are directly connected to the results that you get; that is, results are the outcome of your thoughts, emotions and behaviors – the T + E + B = R equation. So, you’ve got to attend to the data of this equation because it is involved with every trading decision that you make. Because there are two kinds of data (mechanical and internal), you need two ways of documenting your trades. One is a Trade Log, which tracks the mechanical data, and the other is a Thought Journal, which tracks the internal data. Both are equally important to your success. Humans are impulsively driven by greed and the desire to dominate. They will take the easiest way to get and keep what they want. This often has negative and unintended consequences that are frequently destructive. And humans are not naturally prone to accountability or self-discipline, which is why we need laws, rules, boundaries and limits in society. Trading requires self-imposed limits and these limits must be created through personal accountability. You must know what you require in the way of strategies and rules in order to create effective self-limits or self-control in both your planning and execution (the mechanical data), and your thoughts and emotions (the internal data). When you accurately record the thinking that was present during a trade, it exposes your “actual” state of mind, not the one that you think you have. Here are some of the things to look for:

 

1. Was my stop/limit hit, or did I take myself out?
2. How much time was I in the trade?

Then compare your recorded behaviors and thoughts to your Trade Plan:

 

1. Where are the inconsistencies?
2. Where are the congruencies?
3. Is anything different than what I planned or expected?

It’s very important to identify the weaknesses and the strengths of your execution. After that, new habits can be created.
It is critically important to identify the faulty patterns of thinking that cause bad behavior. After identifying the bad behavior, isolate it by creating rules to follow. When the rule has been created, use mental techniques and tools like the ones taught in Mastering the Mental Game to help support effective ways to modify the bad behavior one trade at a time. Thought and emotions are difficult to control. The difficulty stems from the deep-seated and unconscious nature of the programmed patterns that cause the unwanted behavior to begin with. The goal is to get into a mental place to see how the behavior reflected foggy thinking, and how thoughts and emotions work together to create results — this knowledge helps to create rules designed to cut losses and position you to re-observe the order flow without the emotional noise.
Different parts of you reflect different program patterns. You are not always the same and how you are is based upon what part of you shows up. Also, the environment, biorhythms, discomfort vs. comfort, and recent events that may have shaken your confidence, all have an impact upon who shows up. So, sometimes you are confident and relaxed; sometimes you are agitated and anxious; sometimes you are depressed and fatalistic. Deep-seated programming and limiting beliefs create these emotions. They result in “who is coming to the trade today” and greatly affect how events are perceived. In other words, do you perceive the reality of the chart? The goal is to get on the right side of the order flow. The ideal as a trader is to approach the market system in a balanced and positive state. You want to be focused on supporting your effectiveness, and a big part of that is accepting the market reality. This means remaining in a constant state of observation. The question, is “How close to my ‘A’ Game, my highest and best self, am I at this moment?” The market is constant. You don’t need to be concerned with the market. You just need to be fully present, in that moment, and available for it.
Your Thought Journal and Trade Log work together to confront weaknesses and consolidate strengths. As you consistently support your effectiveness by building your strengths and by consistently minimizing your weaknesses, you become more and more aligned so that you can use all of your resources in the market. With experience, and by increasing your capacity for internal alignment through journal work, you are able to more accurately track the market movements. When this happens, you see the order flow as it is and not as you “wish” it would be. The Feedback Loop of the Thought Journal and Trade Log provides a road map and blueprint of where you want to go and what you want to build in your trading so you can accurately see and participate in the order flow without being overly influenced by emotional interference. Emotions are an inextricable part of who we are as human beings. The point is to understand more about them so they can be contained and managed and used as an ally to boost the drive to stay on course. By knowing your strengths and weaknesses as a trader, knowing the state you want to achieve, and knowing you are on the path to getting there, you close the gap between you and getting the results that you want.
So, always have your journals at the ready. Remember, you can’t change what you can’t face, and you can’t face what you don’t know. Document, record, measure and track your market participation. Learn to bring your “A” Game to your platform and keep your “A” Game while in the trade. This is just one of the concepts that are taught in the Mastering the Mental Game Online, On-location courses and the coaching in the Extended Learning Track (XLT) program. Ask your Education Counselor for more information. Also, get my book, “From Pain to Profit: Secrets of the Peak Performance Trader.”
Happy Trading,
- Woody Johnson

By Sam Seiden

In our graduate online education program, the Extended Learning Track (XLT), one of the very first lessons we teach is on “Odds Enhancers.” This is because it is a critical part of identifying the proper trading opportunity. After all, what trading and investing ultimately comes down to are two things: Where do I get in and where do I get out… The optimal opportunity gives us a low risk, high reward, and high probability entry and exit point. This means getting into the market right before the move in price happens and exiting right before the move ends – market timing. The Odds Enhancers help us identify these key turning points in markets with a very high degree of accuracy and that is the focus of this piece. Why do prices ever turn in any market? Simple, because of a supply and demand imbalance at a price level. So, to identify market turning points in advance, we need to be able to identify price levels where supply and demand are out-of-balance. Another way to say this is… We need to be able to identify the picture that represents a supply and demand imbalance.

While it would not be fair to XLT members to go over all the Odds Enhancers in a free article, I will share two key Odds Enhancers with you that should help you, whatever type of trader or investor you are. Whether you trade stocks, futures, Forex, or options, all that really matters again is: Where do you get in and where do you get out? To go over these two Odds Enhancers, let’s review a trading opportunity we had in a live XLT session with our students.

Live Trading Session (XLT) – January 11th, 2012 - Figure 1


Figure 1
During this live trading session, I was setting up the trading opportunities with our students before the market opened so that we could focus on simply executing our plan once the market got going. The plan was to sell short at the supply level shown above if and when the market rallied to that level. As you can see on our pre-market prep screen, that was the key supply level we went over before the market opened in the S&P (SPY). The level itself has a few Odds Enhancers that made it a very quality level. This is a two minute chart so the opportunity was for a short-term day trade. As we now dive into these two Odds Enhancers, remember that the focus is to identify the picture that represents a supply and demand imbalance.

Odds Enhancer #1: How Did Price Leave the Level?

Notice there was a gap down in price from the level. This is key… Price can leave a level in one of three ways. First, it can be a gradual move away from a level. Second, it can move in stronger fashion, maybe with big red or green candles. Third, it can gap away from a level. Out of those three choices, the gap is the picture that represents the strongest supply and demand imbalance.

Lesson: The stronger the move in price away from an area, the more out-of-balance supply and demand is at the area.

Odds Enhancer #2: How Much Time Did Price Spend at the Level?

Notice how much time price spent at the level. In this supply level on the chart, price spent very little time. Most trading books teach you to look for lots of trading activity at the level with many candles on the chart when identifying key market turning points. If you think the simple logic through, however, you will find that the opposite is true. At price levels where supply and demand are most out-of-balance, there are very few transactions (trades). This is because of the big imbalance. So, the picture on the chart is not going to be many candles and lots of trading activity like all the books say; its going to be very little trading activity like the opportunity we had in the XLT with the S&P shorting opportunity.

Lesson: The less time price spends at a level, the more out-of-balance supply and demand is at the level.

When price finally rallied to the supply level, the plan was to sell short at the level. Who would buy at that level? Someone who is not focused on the reality of how and why prices move and turn in markets. Trading is simply a transfer of accounts from those who don’t know what they are doing into the accounts of those who do.

Hope this was helpful, have a great day.

- Sam Seiden

By Michael Atias

Online Trading Academy has educated thousands of people on how to trade the markets and now is launching OTA Tax Pros, Inc. to serve all traders in their complex tax needs. We are excited to provide exceptional tax service to all traders. We will provide you with strategies and techniques that will increase your cash flow by reducing your largest expense as a trader – TAXES!

Do I meet the guidelines for trader status or trader in securities?

The natural inclination is to think that all day traders can file their taxes with the status of trader in securities. Unfortunately, the answer is not as simple. The Internal Revenue Code (IRC) completely lacks guidance on the requirements needed to meet trader status. Instead, we must look to tax court cases dating all the way to the 1940′s for guidance. From tax court cases, we can identify two tests that must both be met in order to qualify for trader tax status:

The taxpayer must seek to profit from daily market movements in the price of securities rather than profiting from dividends, interest or capital appreciation.
The taxpayer’s trading must be substantial, regular, frequent and continuous.
The following factors should also be considered in determining if your activity is a securities trading business:

Typical holding period for securities bought and sold.
The frequency and dollar amount of your trades during the year.
The extent to which you pursue the activity to produce income for a livelihood.
The amount of time you devote to the activity.
As you can see, the biggest problem with trader status is the absence of a clear definition. There are no precise standards telling us when trades are considered short-term, or how large a volume you need, or how long a period you must continue the activity to be considered a trader. Sometimes it’s easy to determine that someone is or is not a trader, but in many cases, the answer isn’t clear. You need to seek professional advice to determine your trader status. Remember, if you are not qualified as a trader in securities, you are considered to be an investor even if you call yourself a day trader.

“Trader in securities” tax benefits

“Trader in securities” status allows you to treat your trading as a business and deduct all necessary and ordinary business expenses. You are also able to elect the Mark-to-Market method of accounting, allowing you to overcome the $3000 capital loss limitation per year and eliminate all wash sales. The result is clear – reducing your tax liability substantially. You need to seek professional advice to determine your trader status.

Additional Tax Tip

Buy a house – you will be able to deduct mortgage interest and property tax as an itemized deduction as well as interest on home equity loans (up to $100,000). The biggest home-related tax benefit, however, could come when you sell your home. You can exclude up to $250,000 in profit (or $500,000 if married filing jointly) from the sale of your principal home. Currently, the federal long-term capital gains tax rate is 15%, so potentially, you can save up to $75,000.

Be sure to visit our OTA Tax Pros website to find out how you can attend a free tax planning webinar.

- Michael Atias

By Rick Wright

Hello traders! One of the main topics of conversation that I have with new traders or students at Online Trading Academy is about the quest for trading’s Holy Grail. While most are interested in a combination of technical analysis studies with supply/demand and a trend indicator or three, the actual Holy Grail is none of the above. In fact, it is much easier! The actual Holy Grail is proper risk management. That’s it. End of newsletter, talk to you in two weeks!

Actually, it is a bit more complicated than that. As we’ve mentioned numerous times, the two main traits that successful traders have in common is to cut their losing trades early, and letting their winners run – usually with a reward to risk ratio of 3:1. In this week’s Lessons from the Pros newsletter, I’d like to go a bit more in depth into your position sizing as you are learning to trade. Learning to trade is much like learning anything new in life – riding a bike, playing golf, or playing a video game. The main difference is the fact that you can lose money while you learn – sometimes a lot of money! In fact, some people lose or “blow up” their entire trading account as they are learning this great thing we call trading. I always recommend new traders to start trading very small position sizes while they are learning, and here is a scale, or “ladder,” that we use in class:

Position size: demo, to get a baseline
How long? 20 trades, or 2 weeks, whichever is longer
During this period, I want you to keep track of a few performance measures – your win/loss ratio, average winning trades and average losing trades. For example, after 20 trades, you may have 10 winners and 10 losses with an average winning trade of 25 pips, and an average losing trade of 10 pips. This would be a profitable “baseline” of your performance. After you have a profitable baseline in the demo account, it’s time to jump into the real live money trading! So, how big of a position size should you take? A common amount of risk we recommend is 1-2% of your aggressive portfolio value. This means that if you have a $10,000 Forex trading account, we don’t want to risk more than $100-200 per trade. What I would prefer new traders do is start with an EXTREMELY small position size – 1 mini lot, if possible. (With smaller accounts, you may want to consider micro lots.)

With one mini lot of the EUR/USD, one percent of the above mentioned account would mean a stop loss of 100 pips – each pip is a dollar in this currency pair. If the trade you are considering only needs a stop loss of 20 pips, you could trade 5 mini lots, according to the 1% rule. However, you haven’t earned your trading stripes yet! Stick with the one mini lot because live money trading affects us differently than demo trading does. So, how long should you trade 1 mini lots? Just like you did in the demo platform – 20 trades, or 2 weeks, whichever is longer. Keep track of your performance – is it profitable? Was it close to your baseline from the demo account? If so, congratulations, you are doing it right! Now you may trade 2 mini lots. Guess how long? Two weeks, or 20 trades, whichever is longer. You can probably guess what happens next – 3 mini lots, then 5, 7, 10, 15, 20, 25, 30, etc.

Depending on your trade management style – all in/all out, scaling in and out – you may want to consider going from 10 mini lots to 1 standard lot. Some brokerage firms offer better pricing for standard lots vs. mini lot accounts.

There are two main reasons for this position sizing plan. The first is to have very small risk and losses until you get good at trading. What is the point of being a good trader if you’ve blown up your trading capital while you were learning?? Do you like working for someone else, scraping together a few dollars here and there to fund another trading account? The whole point is to have trading capital to trade and to change your life, not to watch the demo account video game!

The second reason I recommend this position sizing “ladder” is your emotions. The market doesn’t care about your position size – only you do. If you are down 20 pips on the EURUSD with two mini lots, it’s only $40. You probably have that much money in your change bucket at home! If you are down 20 pips on 5 standard lots, you are now talking about $1,000. And yes, you could be down that 20 pips in a few seconds! That $1,000 staring at you in the face might be difficult for you to handle in the beginning of your trading career – the market doesn’t care about it, but YOU DO! So, the plan is to build up some emotional tolerance to the potential negative figures in your profit and loss column. Over time, that 20 pips is all you will look at – not the money. It won’t matter to you if a trade goes against you $40 or $1,000 – you are trading the chart, not the red and green profit and loss figures on the screen. Keep doing what you are good at and eliminate the bad habits – with proper position sizing, you will be able to keep the risk low until trading becomes simple!

Until next time,

Rick Wright

By Josip Causic

In this article, I will compare two trades; one mine, and one from a trader who shared his trade with me asking for my take on it. The trades were very similar in a sense that the underlying products were optionable and they both had weekly options listed. They also both had individual strike prices with very little or no open interest and volume. Should we even be considering trades on options like these that have such low liquidity?

Weekly WMB trade January 2012 Week A

The first trade was on the WMB in which a trader had noticed a great technical setup. Basically, it was an All-Star Entry, which many of our Online Trading Academy students are familiar with. For those who aren’t, contact your nearest Online Trading Academy center to find out about our classes.



Figure 1: WMB Daily chart
The stock gapped four Standard Deviations down, and the trader executed a Buy-Write Covered Call strategy. He simultaneously purchased 500 shares of the WMB stock for 27 and sold five weekly 29 calls on it for 2.50 per contract. His BEP (Break Even Point) was 24.50 (27 – 2.50). When he contacted me, he was quite surprised that his weekly options that had only four more days of life span left had such rich premium. The Jan Week A options were expiring on Friday the 6th, and for him, all that needed to happen to keep 2.50 credit was that WMB stay below 29.

I was able to see his footprint on Time and Sales because that particular weekly 29 call did not trade many contracts that Tuesday morning, 01/03/2012.



Figure 2: WMB Time & Sales
Because of the lack of Open Interest and Volume on the individual strike prices, this trade does not fit Online Trading Academy requirements for an options trade. However, the bottom line is that the trade worked out perfectly. On the 6th, the stock closed at $27.39 and the trader made a profit of 0.39 per share, plus he kept all the credit he received from selling the 29 calls.

Weekly XEO trade January 2012 Week B

Similarly, in my trade on the XEO (European style S&P 100), the setup looked great technically. The XEO was trading below the 590 level and strongly above the 565 level. However, the Open Interest and Volume on the individual strike prices of these weekly options were quite low. The question that I had in mind on that Thursday morning (01/05/2012) when Jan Week B options were listed was, “Do I talk myself out of a perfectly reasonable trade, technically, because of the lack of option liquidity?” Ultimately, the decision had to be made based on the question of whether the trade was worth the risk taken. (Or as some traders say: Is the pay off worth the aggravation?) In my opinion, the answer was yes; however, I did first send in a foot soldier (a single contract) to discover what the best possible price was that I could get for my 595/590/565/560 Iron Condor. Initially, I asked for a credit of 1.45, then 1.40, then 1.35, but it was only at 1.30 that I was finally filled. Next, I sent in the order with my troops (10 contracts) to be filled at the same price, which they eventually were.



Figure 3: Four Time and Sales of XEO week B options
Those familiar with the Iron Condor strategy know that I risked only 3.70 (5.00 spread minus the credit) to make 1.30. For a directional trade, this would not make any sense because more is being risked than what the potential reward is. However, this Iron Condor was a non-directional trade so the bottom line of what is at risk needs to be taken into account. Between Thursday morning (01/05/2012) and Friday (01/13/2012) close, the XEO could trade anywhere as long as it did not close above 590 or below 565. At the entry, the XEO was at 580, and on the last day, it closed barely above 580.

The risk to reward on this trade can be calculated (1.30/3.70) to get the rate of return on this investment; in this particular case, 35% within a week.



Figure 4: TOS Trade Tab
This last figure shows the outcome for the XEO trade. However, let us go back to the original question: Could I have talked myself out of a perfect technical setup because of the lack of option liquidity on the XEO? Could anyone?!?

In conclusion, a lack of Open Interest and Volume on individual strike prices is often associated with a lack of liquidity. However, if we are sellers of options and “the price is right” (just like the TV show), then occasionally, it is acceptable to (option) trade in such an environment. As long as we are aware that if we are wrong and need to buy back our obligation, we will have to take full responsibility for our actions; in other words, pay a higher premium price because of the slippage. Ultimately, everything comes down to whether we are trading on a good technical setup or not. Sometimes you do not have to talk yourself out of a good trade because of some small imperfections.

- Josip Causic

By Don Dawson

Occasionally, a Commodity offers prices to investors at a deep discount. Many times, there is a reason for a market to be cheaply priced, and we would do well to keep shorting that market. We have all seen a stock that was trading for $80 per share and weeks later, see it trading for $15. Our first thought is this is a bargain because the price has dropped so much. Many brokers call their clients that were put in the stock at $80 and tell them, “If we liked it at $80, then we have to love it at $15.” Unfortunately, for most investors, the stock usually continues on down and eventually goes to $0. That is the nature of stocks; when they are cheap, there is a good reason and we should avoid them at all cost.

Commodities, on the other hand, are a different creature. Unlike a stock, which nobody has to have, Commodities are a true supply/demand type of market – meaning we must have Commodities to survive every day. Imagine life without energy products for transportation or heating our homes, food products for both human consumption and the livestock that we later consume, textile products for clothing and metals products for construction or jewelry (gentlemen, Valentine’s Day is close at hand, hint, hint). Pricing shares of a stock has nothing to do with production cost, but a Commodity price is heavily influenced by how much it will cost to produce and store that Commodity product for future delivery.

All Commodity prices have minimum and maximum prices based on the production and processing cost of that Commodity. Imagine a Gold mining company having to produce Gold. There are many costs associated with this process such as labor, equipment, taxes, transportation, etc., therefore, to produce an ounce of Gold, there has to be a production cost. Sometimes these prices are referred to as floor prices. In the early 90′s, when Gold was selling for about $250 per ounce (yes, it really was that cheap at one time), the floor price (cost to mine an ounce of Gold) was approximately $250. When market prices do not allow a good profit margin, this forces many businesses to close their doors or mines in this case. The net result is fewer mines produce less Gold and supply decreases worldwide. With less supply of Gold around the world, it takes very little demand to spark a bull market at a later time. Once the demand picks up and prices begin to rise, the mines open again and eventually, they produce enough Gold so that there is sufficient supply worldwide and prices begin to drop. Higher prices always attract more producers of a Commodity and this creates excesses. The cycle repeats itself over in almost every Commodity market like this.

I would like to talk about a market that is at one of the extreme levels currently.

Disclaimer: This is not an investment/trading recommendation. This is purely educational material and should be taken as such.

Natural Gas has been in a bear market for a while and has started to come down into some very long-term demand levels. These levels are approaching what it costs to produce Natural Gas. Figure 1 is a long-term chart, courtesy of Moore Research Center – www.mrci.com.


Figure 1
Figure 1 shows us that when Natural Gas reaches prices between $1-2, the market finds support. This monthly chart dates back to 1991 and shows where the market is flooded with product supply. Now, some 21 years later, we are seeing prices approaching this area. Once this happens and Natural Gas rigs begin to shut down due to decreased profit margins, we should see the next up move in prices when demand reappears. This demand could come in multiple forms:

The United States is slated to become the world’s largest producer and exporter
The housing market rebound will create a demand for more Natural Gas to be used for heating due to the low cost
Currently, there is a threat of war when Iran attempts to shut down the Strait of Hormuz. This is not a question of if, it is a question of when
The United States’ infrastructure is completed to transport Natural Gas to shipping ports more economically and timely
The cold weather in the Northeast United States winter season
The above points will all have an impact on Natural Gas prices. When the conflict of the Strait of Hormuz occurs, we will see a price spike in Crude Oil (temporarily, but none the less a spike) and this will result in the world looking for alternative fuels again. It is a shame it takes situations like this to promote a search for alternative fuels, but that is how it is.

For an investor to participate in this market, I would recommend using an Exchange Traded Fund (ETF) and not the Futures market. The Natural Gas market could stay at relatively low levels for an unknown period. Since the Natural Gas Futures contract expires every month and the distant months are not very liquid, this could lead to a higher cost to invest using Futures contracts.

The ETF I would recommend is the United States Natural Gas Fund (UNG). When using an ETF, the investor is not faced with contract expirations or rollovers as they would be faced with in the Futures markets. If an investor finds that they are profiting from their investment in UNG at a later date, perhaps they could use some of the proceeds to invest in some Futures contracts to increase their returns using margin.

UNG trades on the New York Stock Exchange Arca. Unlike some ETFs, UNG is made up of purely Natural Gas Futures contracts, Forward contracts of Physicals and Swap contracts of Physicals. This allows the ETF to track the Physical Commodity rather than companies that produce and process the Commodity. Their objective is to track the price of Natural Gas with minimal management expenses.

Figure 2 is a chart that shows how closely the UNG tracks the Natural Gas Futures contract.


Figure 2
In the past, the UNG has performed miserably tracking the underlying Natural Gas Futures contract. This was mostly due to the fact that the ETF would only use the Futures markets to trade with. The Natural Gas contract expires every month and with each of these expirations, UNG was forced to pay a higher price every time they rolled over an expiring contract. The effect was that UNG kept incurring higher priced contracts that never seemed to catch up before the next expiration came along. Since 2008, after the energy price spike, the Commodity Futures Trading Commission (CFTC) began to enforce position limits on the UNG to limit the number of contracts UNG could buy. The CFTC felt that there was a possibility that UNG and other ETFs were part of the cause of the 2007 energy price spike. To avoid these position limits, UNG has begun using Physical Forward and Swap contracts which do not expire so frequently. This will allow UNG to hold positions longer without the frequent rollovers they incurred in the past. UNG still uses Futures contracts, but this is not the only investment vehicle they use now. Without these frequent rollovers, perhaps UNG will more naturally track the underlying Commodity of Natural Gas.

Using a Commodity ETF in your portfolio is the beginning of true diversification. Just because you have different asset class stocks in your portfolio does not protect you well enough due to the nature of how most stocks rise and fall in tandem. Holding and being educated in different investment asset classes is how a professional investor diversifies their portfolio

Remember that this type of investment is not meant to be an overnight short-term get rich strategy. This could take a while, but as with most good things, it could be worth the wait.

When Commodities get to these depressed levels, it surely deserves a look into an opportunity. If you feel that Natural Gas can go to $0 and eventually go away, then perhaps this is not your investment. For those of us who understand the importance of Natural Gas, we know that the laws of supply and demand will win out as it always does in any freely traded market.

“Experience tells you what to do; confidence allows you to do it.” Stan Smith

Happy Chinese New Year,

- Don Dawson

By Dr. Woody Johnson

Trading can be a very challenging endeavor indeed; and one of the variables that makes trading so difficult are the emotions that become activated in the process. The reason why emotions become so involved is because with every tick of the market while you are in a trade, you are either gaining or losing “money.” It is the only business venture where this takes place. Additionally, money or capital is a sociopolitical and economic driving force in our society. Power and influence are direct derivatives of capital. Due to the pervasive nature of economics, both in the media and in daily lives, from an early age, we form belief systems about money that become important aspects of our identity. For instance, if someone has significant capital, then there is a tendency to feel powerful, competent and smart. Conversely, if someone is financially challenged, the tendency is to feel impotent, inept, and stupid. So, when you are in a trade, every blemish, weakness, or character flaw in your personality is going to be challenged, which prompts emotions of fear, anxiety, anger, doubt, greed, impatience, frustration, and guilt…especially if you lose money.

Humans are emotional beings and emotions can’t be removed from the physical landscape. In fact, some people say that they need to become emotionless. However, you cannot take emotions out of the trading equation, nor do you want to. You wouldn’t want to because just like the negative emotions that distract your attention from what matters most, there are positive emotions that rivet your attention – for example, inspiration, determination, patience, passion, and curiosity. These emotions support behavior that is connected to your highest and best trader; that is, your “A” Game. Now, it is possible to gain a degree of distance between you and your distracting negative emotions, however. This happens through training and the formation of positive habits that help you to maintain a focus on what matters most in the trade – doing the right things habitually in order to get the right results habitually. Through training, you develop the capacity for emotional strength and endurance while in the trade. This is the same type of training that helps special agents, astronauts, world class athletes and physicians to remain focused despite being in a life and death situation. Do you remember Apollo 13? This was one of the earlier space projects that almost ended in disaster. They made a movie about it with a title of the same name. In the movie, Tom Hanks played the commander of the mission and he is heard to say, “Houston, we have a problem.” The problem was life-threatening and if a solution was not identified, they would have perished in space. So, it’s safe to say that they were quite afraid when the situation presented itself. What helped them to maintain a focus on what matters most is the fact that they had trained for years with protocols for every potentially problematic situation that might occur; and they trained over and over again until what to do was habituated and automatic – even in the face of death! They remained undistracted and in the now. They remained on purpose and on task. This is trading while in the moment.

Because trading can be so difficult, it is of utmost importance to remain “in the moment” during the process. While you are in the moment, you are more likely to have a higher percentage of your potential available to you. When you are distracted, the converse happens; you have a smaller percentage of your internal resources available to focus on the task at hand. When you are “in the moment,” you are more likely to be aligned in body, mind, and emotions as well. When you are aligned, there is less of a likelihood of the internal conflicts that make decisions and follow-through so difficult. In other words, when you are aligned in body, mind and emotions, you are going in the same direction and towards the same goal.

The point is to remain in a state of self-awareness, which helps you to be in the moment for the moment, fully available, fully present and in the now of the trade. Through self-awareness, internal resources, like the ability to remain focused with intention and attention on your trading process, and the ability to see both the big picture and the details with emotional tools at your disposal in the service of your “A” Game are at your fingertips. When you do this, you can resonate with the reality of the charts and the markets without succumbing to internal bias. You can develop a “positive trader trance” in order to be proactive in trading what you see and you’ll be less prone to being seduced by illusions brought on by what you’re making up about the market, the news or the charts.

Now, being fully available, fully present, in the moment, and in the now takes practice. The tendency for most people is to focus on the past or the future in a negatively obsessive rumination about past injustices and losses, or future angst ridden doom and gloom visions of how things will turn out badly. Your mind is always turned on and you must break the spell of the ego which makes you a slave of your rampant, unceasing, monkey-mind that is full of underlying subconscious limiting beliefs, negative thoughts, and painful emotions. Breaking the spell of the ego means in part that you must identify the gaps between the thoughts where you can return to just being and without judgment notice and become aware. The practice is necessary because it’s quite difficult to wrest yourself free of the barrage of thoughts and to allow yourself to focus on exactly what you are doing in “this” moment only, to find joy in being on purpose and on task with even the most seemingly mundane chores. Make a game of it and you’ll find that it becomes easier and easier to focus in the moment and bring yourself closer to a “flow” experience. The flow experience was coined by psychologist Mihaly Csikszentmihalyi in his book, “Flow: The Psychology of Optimal Experience.” In it, he outlines his theory that people are most happy when they are in a state of flow or concentration – in complete absorption with the activity and situation at hand. Flow is identical to the feeling of being in the zone. It is being completely involved in an activity for its own sake; the ego falls away and time flies. Your whole being is involved and you’re using your skills to the utmost.

There are several tools that can help with being in the now and in the flow state. We teach a number of them in Mastering the Mental Game. Tools like Emotional Freedom Technique, Meditation and Self-hypnosis that can support a positive trader trance where you’re apt to develop a magnificent obsession with doing only what is in the best interest of your “A” Game and highest and best trader. For more information, ask your Online Trading Academy Education Counselor.

Additionally, my book, “From Pain to Profit: Secrets of the Peak Performance Trader,” is available on Amazon.

Happy Trading,

- Woody Johnson

By Sam Seiden

The Moving Average… It is a tool that is talked about in almost every trading book that has ever been written. Every day on TV, CNBC, Bloomberg, and others are telling us where the S&P and other key markets are in relation to the 200 day moving average, for example. Every charting package on the planet comes with every possible configuration of a moving average for you to use. Because of all this, moving averages must be one of the most important tools for traders and investors, right? You start to think that it must be impossible to make money in the markets without using moving averages. When we take a deeper look into the purpose and result of using moving averages, you start to see that not only do you not need to use them, but more importantly, they can actually hurt you if you don’t understand the risk that comes from using them as a primary buy and sell decision-making tool and that is the focus of this piece.

Instead of going through many charts to find the perfect picture to use as an example to illustrate my logic, I like to use real trading examples from our live trading rooms in the Extended Learning Track (XLT) program. In our live Futures trading XLT, January 13th, we identified a demand level for our students during our pre-market analysis. This was a demand level in the S&P Futures of 1271.50 – 1274.50 (red box). Once price declined in the S&P to our demand level, the plan was to buy it when it reached our demand level with a protective sell stop just below the level to manage the risk and have our profit targets above the level.


Figure 1
Shortly after the stock market opened, price declined to our demand level where our students were instructed to buy. Price moved higher and the trade worked out very well for our students; they executed our rule-based market timing strategy. Now, let’s go over the same trading opportunity, but instead of applying our strategy, let’s use a moving average which again, is a tool talked about in almost every trading book ever written. Most people are taught to buy when the moving average turns higher. As you can see here, by the time the moving average turns higher, price has rallied quite a bit already which means high risk and lower reward if you use your moving average as a buy signal. Furthermore, notice that the moving average was sloping down when our rules gave the buy signal. Have you ever read a trading book that said buy when the moving average is sloping down? Also, notice that the short-term trend of price was down when our strategy gave us the low risk buy signal. Again, have you ever read a trading book that said to buy in a downtrend? Of course not, yet this is the action you take when you properly buy and sell anything in life, don’t you? This is exactly how you make money trading as well, but the trading books almost teach you to do the opposite which is very flawed. Many of the traders following indicators such as moving averages are really smart people who have the best of intentions, they’ve just been taught wrong. It’s not rocket science; traditional technical analysis can be overly complex, often inaccurate and may cause “paralysis by analysis.” This is why we focus on teaching students our simple rule-based strategy using the principals of supply and demand aimed to help them find “real” low risk, high reward, and high probability trades. Waiting for the moving average to turn higher, you certainly get confirmation, but at the cost of extremely high risk and lower reward. Furthermore, that confirmation is an illusion because you still don’t know exactly what price will do next; this is all about probability and entering a position when the odds are stacked in your favor.


Figure 2
Again, there are so many books on trading and most people start the learning process by reading the trading books, yet the vast majority of traders and investors fail when it comes to achieving their financial goals. For the most part, the books say the same thing and teach the same conventional concepts. Specifically, most of what those books teach is conventional technical analysis including indicators and oscillators such as Stochastics, Mac-D, moving averages and so on. Here is the problem… Conventional technical analysis is a lagging school of thought that leads to high risk, low reward, and low probability trading and investing. All indicators are simply a derivative of price meaning they lag price. By the time they tell you to buy or sell, the low risk, high reward opportunity has passed. They have you buying after a rally in price and sell after price has already declined. At Online Trading Academy, we don’t use conventional indicators, oscillators, or chart patterns that you read about in the trading books as primary decision-making tools because adding any decision making tool to our analysis process that lags price only increases risk and decreases reward. Why would we ever want to do that? I know the information in trading books has been around for many decades, but that doesn’t mean it works or helps people. Like learning anything else in life, there is the book version way of learning it and the real world learning. At Online Trading Academy, we focus on how proper trading and investing works in the real world which is what our core strategy is made of. Again, if you think about it, most people read trading books and most people lose money; maybe they should stop and consider how flawed the logic is in that conventional thought and action. My goal in this piece is not to beat up books and theories, it is simply to open your mind to a lower risk, higher reward way of trading and investing.

Hope this was helpful, have a great day.

- Sam Seiden