Lessons by Joe Ross

I traded for 2 weeks on demo..i thought was very easy and started real one.
after 2 months i lost half of money
but know i recoverd all and im starting to earn.
I guess the only solution is:
find your system, and play little amounts per trade, risk managemnt, and
don't believe you will be able to get rich quick. If you think this way, you probably go to be poor quick
By your own system I dont necessary mean a kind of chart system or following macro and micro economical events..somebody feels good to trade only the news for instance. Me I trade news and follow a kind of own system. By now it works. but I always play littel amounts per trade.

This question was sent to me from one of our students: "Hey Joe! Can you use trend lines to spot turning points? Is there a way to know if the turning point represents a trend change?"

When down-trend resistance line intersects the up-trend support line a "Turning Point" is formed. Expect the trend line with the longest time period value to win the battle between these buying and selling forces. A longer term down-trend channel resistance line should overpower the first challenge of a shorter up-trending channel support trend line. Expect either a short term trend reversal or rapid short term trend acceleration at the Turning Point. The first rule, after a support trend line is broken, is to look left, and find the first two days minimum reaction bottom directly below the current price level, that price becomes the next downside target. The lowest price of that two bar correction and lowest close are a support zone, where prices could find support and create the new trend channel support trend line.

Can you post a chart? I have a hard time forming picture

Hi Bongrak,

Trend lines are lagging indicators, same as moving averages. I don’t see any way to use them to spot turning points until prices have actually broken the trend line. Turning points may not represent a “trend change,” but they certainly do represent a “change in trend!”

JR

Don't trip over the hammers and doji stars!!

Saw in the chart the other day, double doji's!! Two days in a row!! If that ain't a turning point, I don't know what is.. AND.. the 3rd day.. Shot up from a downtrend to an uptrend like a rocket..

So know your candles!! Candles are not lagging.. Well.. sort of lagging!!

This question was sent to me from one of our students:"Hey Joe! I really have trouble seeing chart formations. I have to find a way to trade using indicators. I want to trade channel formations. Can you help?"

See if the following will help you: Every diagonal support trend line has a parallel resistance trend line that forms the trend channel. You can use Stochastic values to confirm buys made near support lines and sells near resistance lines, until a channel is broken on a second Close basis. A single Close violation, one that also closes below a two day correction, may also reverse the trading positions. When a trend channel line is broken with two consecutive Closes, a new uptrend channel may be constructed, unless two short term lower highs and lower lows have formed; then a down trend channel is also formed. The initial purpose trend line construction is to draw them at the sharpest possible angles connecting ranges and closes so they are broken until a longer term channel may be constructed that will hold for several weeks. Some support and resistance trend lines will not be parallel, and may intersect at "Turning Points." The turning point often functions as a time and price objective, but may be thought of as a price where the market will accelerate or reverse trend.

This question was sent to me from one of our students:
Hey Joe! My greatest fear in the market is that of missing a move. I just can’t stand the thought of missing “the big one.”

The best way to handle that kind of fear is walk away from the situation. Get up, and walk away from the computer and any news you may be watching. Remove yourself from whatever it is that triggered the fear. Do anything that will take you out of the fear/panic mode.

Don’t sit down to trade again, and don’t return to the markets until you have managed to achieve some emotional control over your fear/panic reaction. If you can’t get a grip on your fear, then stay away until you are back in control.

Most likely you will find that even if you keep thinking about the move you may be missing, simply getting away from the keyboard and monitor is enough to make a difference. It removes the demand to take action and gives you the mental space to gain perspective and let go of your knee-jerk reaction.

for me, the thought of loosing money makes me stay out of trades that I'm not confident about. Anyways, great thread Joe.

Remember ..... the market is always there......and there will be another BIG ONE.

So don't sweat the small stuff.

This question was sent to me from one of our students: "Hey Joe! Is there any time that you feel there is a valid use for oscillators and/or divergence?"

Yes, there is a time when such things may prove to be of value. The opposite of trend following trading methods involves trading techniques that enter on the tops and bottoms of movements, or counter trend trading. Oscillator divergences may help accomplish this highest risk type of trading. Having set predetermined time and price objectives that should form below a previous top better than 70% of the time greatly facilitates this kind of trading. Selling short term rallies until intermediate downside price objectives are achieved is the best way to execute this strategy. This is one trading area where oscillators and their divergences are valuable. Strong down-trending intermediate markets – look to sell when short term RSI values rebound to hit 50, weaker downtrends hit RSI's of 70 or higher. No system creates more open equity, defines trends, and forecasts the time and price objectives better than the 1-2-3 trading pattern, which may be the first objective pattern recognition system ever created. When the 1-2-3 price objectives are 200%+ over extended, the market is technically due for a correction of the 100% downside minimum value.

Joe Ross

And yesterday, the NFP report is another the big one. Surely, many people with the correct positions are in happy mode today.

cheers

This question was sent to me from one of our students: "Hey Joe! Is there anything valid about trading markets using astrological forecasts?"

My opinion based on personal experience is that traders should avoid trading markets on astrological forecasts or predictions. For every futures buyer there is a seller. To assume astrology has its effects only on specific traders causing them to trade ignorantly and not affect others, makes no sense. Over five hundred scientists paid for a full page ad in the New York Times to state, "astrology is not a science and no predictive value has ever been documented." Astronomy was the first science, astrology the first pseudo science. Does that mean you should trade using astronomy? Only if you think a bunch of Martians may be hot to buy water futures.

I once tried trading by the moon. I went into it deeper by far than did Welles Wilder with his Delta Phenomenon. I charted every phase of the moon, not just new moons and full moons. For awhile, I actually thought I had something. But it turned out to be nothing more than my imagination and deep desire to finally find the holy grail of trading. It’s amazing as to what you can convince yourself is true. Interestingly, I was actually able to convince a whole bunch of other professional traders that I really had something that would work. All too soon, we found out that it was nothing but shooting at the moon with a water pistol.

I fully agree with this. I read somewhere that the human brain has a yearning to look for and find patterns to explain things, even where those patterns do not exist. There is some point where you just have to stop and ask yourself, "Does this really make sense?" If my system is to buy when it rains and sell when the sun is shining, it might backtest well for a month or two. But you have to ask yourself, "Does it really affect the markets when it rains?" And the answer is of course, NO.


andersenws

LOL. On the Oregon Coast, it of course does not affect the markets...but with about a hundred inches of rainfall each year, it gives us plenty of time to watch and trade the market. Hehe.

Just being silly, as i watch the market under a typical overcast sky out my window. Gee, i think this soggy environment has even helped my trading, or at least given me lots of good reasons to play inside and study.

One can only have so many wetWalks in a poncho on a beach before heading back to more dryer pastimes.

Thom

This question was sent to me from one of our students: “Hey Joe! Would you mind explaining what the “Tick,” “Tiki” and the “Trin” are, and can they be used with Stochastics?”

The tick, expresses the net total of NYSE stocks that have down-ticked or up-ticked on the last trade. When e-mini S&Ps are making new intra day highs, the tick should be +250 minimum. If the tick is negative, do not take a long position. When new intraday lows are being made, a -250 minimum value should be recorded. If the tick reaches over +500, try to buy a stochastic D line correction at 50 or lower and expect new intraday highs. After 2 PM CST, the open outcry T-Bonds close and S&P prices may rally a little if they were being pressured by the bonds. That may not be true for the e-mini S&P, you will have to test to find out.

The Tiki does the same thing for the Dow 30 as the tick does for the NYSE Stock Index. It measures the tick for the 30 DJ Industrial stocks.

The Trin calculates two ratios of up and down volume on gaining and losing stocks. Below 65 the Trin is bullish and bearish above 110. Numbers are very important. The probability of financial ruin of a system 50% accurate with a 1¬-to-1 pay off risking 10% of capital on each trade is .99%, with a 2 to 1 payoff the probability of financial ruin falls to .008%.

This question was sent to me from one of our students: “Hey Joe! Sometimes I find myself hesitating about taking a trade. Could it be I have analysis paralysis?”

If you’re going to trade, you need to be able to take decisive action. Carrying out your trading plan often requires that you make quick decisions. But when your money is on the line, it is sometimes difficult to make such decisions.

We all have a tendency to want to avoid risk. It could be that you are trying to deal with the fear of loss by over-thinking and over-analysis. You may spend a lot of time studying indicator after indicator, even though most are really measuring the same thing. For example: RSI, Stochastics, MACD, DEMA, and others all measure momentum. True confirmation cannot be obtained when one confirms the other. It isn't necessary to over-think and over-analyze. It is more useful to go ahead and execute a trade and then move on.

It may be useful to conduct a thorough analysis before making a decision, but it isn't worthwhile becoming completely paralyzed by it.

In the end, becoming a successful trader requires taking risks. Putting your money on the line is hard to do, especially for a beginning trader who knows he or she is likely to lose it. That's why it is vital to control risk and trade with a detailed trading plan. It won't prevent losses, but it will minimize them. If you can continue to practice trading, you'll survive the learning curve and be one of the few who become winning traders.

Joe Ross
Trader, Author

Intuitive trading is the height of trading as an art form. Only traders with many years of successful trading experience should attempt to subjectively trade the markets. Trading markets without rational, price action analysis is often just gambling on an irrational emotional feeling. There must be an objective reason for every market action. If there is none, then a subjective approach is being used to trade the markets.

Beginning traders will lose money over 95% of the time subjectively trading markets because their emotional responses are perceiving price action irrationally. A solid price-analysis based trading approach is the best education for a beginning trader. This may even include the use of indicators, which is why I presented them in my books. Until you are somewhat intuitive as trader it is better to go with some form of technical analysis. After years of technical trading experience, the successful trader will know when and how his methodology will fail under specific market conditions. The master trader becomes a master trader by taking consistent repetitive actions under specific market conditions recognized by the master.

There are inherent drawbacks in assuming hypothetical trading system results can be duplicated in actual market trading. The biggest of these drawbacks is that the hypothetical protective stop loss order was not in the market. Locals key off helpless protective stops in the markets like sharks sensing the smell of blood in the water. A $600 real time stop for a system trade may have been picked off by the locals, but a hypothetical system trade may have shown the trade as a $5,000 profit because the hypothetical protective stop was never in the market. Trading using pattern recognition will produce the best results for most traders. This is the goal of most neural network software: to isolate consistently profitable patterns for individual markets. However, it has been my experience that what you see with your own eyes is infinitely better than what the computer sees with its limited vision.

Joe Ross
Trader, Author

This question was sent to me from one of our students: “Hey Joe! What market indicators do you feel are the best to use: Moving Average, RSI, Bollinger, etc....? I realize there are many other considerations.”

Oh boy! There was a time I used indicators as my main tool for entry signals. However, these days if I use one at all, I use it only to show me something I can’t see or to support what I see with my own eyes on the chart—trade what you see!

However if you are going to use an indicator, then prior to making the choice the most important thing to consider is your time horizon. How many bars in the basis of the indicator gives you the highest percentage of accuracy? You need to build a huge amount of evidence before actually making the trade or believing in the signal. Try to use two non-correlated indicators such as the fast Stochastic, and Bollinger Bands, to see if they support your thinking on the trade. If they don't confirm the trade, stay out. By non-correlated I mean they measure two different things. Stochastics measure momentum, whereas Bollinger Bands measure volatility.

Do not attempt to do short-term trading, along with position trading. Since potential gains in short-term trading are so limited, the risk controls have to be very tight, so your indicators have to be much sharper.

The most important thing to remember about technical indicators is that they were never really meant to be "stand alone" indicators. The nature of things prevents a "Holy Grail" from being possible. Indicators can be part of your trading method, but not your entire trading method.

Joe Ross
Trader, Author

Stop placement is where we separate the kids from the adults.

Stop placement is the sole responsibility of you as the manager of your trading business. It is one buck that you cannot pass.

You are the end of the line when it comes to placing stops.

Let me show you why you, and only you, can decide where to place the stop. There are several considerations:

The size of your margin account has the greatest effect on stop placement. When you look at a trade and see where the stop should go, or where you would like it to go, you then have to look at the size of your margin account and determine whether or not you can even consider the trade.

Your comfort level. Although you may have sufficient margin to place the stop where you would like to, and although the stop is logical for the trade, you may not feel comfortable with the stop being so far away (or even so close), and so you will decide not to take the trade with the stop far away, or move the stop back if it appears too close.

Volatility. You must take into account market volatility when placing your protective stop. If a market that normally ticks two ticks at a time suddenly begins to tick five ticks at a time, you must certainly take the level of volatility into consideration. You may find out that you have to place your stop too far away for the size of your bank or your comfort level.

When you use mental stops, there are two other considerations which you must ponder when placing your protective stop. They are: Your speed in placing the order, and the speed at which your broker can place the order. Let's look at each.

The speed at which you can place the order. This depends upon how fast you think on your feet. There are three factors here: Perception, decision, and action. How long does it take you to perceive that NOW is the time to pick up the phone and place your stop in the market if you are calling the broker? Or, NOW is the time to enter your stop via your electronic trading platform?

Then, once you make the perception, how long does it take you to decide to do something about what you have perceived? Are you quick to decide upon your perceptions? Finally, are you quick to act once you have made a decision?

Some of us are very quick in all three areas. Some of us are too slow to utilize mental stops. Only you can tell from the experiences you are having in the market whether or not you are quick enough to use mental stops.

Other factors that can enter in are based upon your trading environment. Whether you trade at home or at the office, if you are subject to interruptions, you dare not use mental stops.

If you are calling a broker, the speed at which your broker can place the order depends upon his organizational setup. If you have a broker who is a "chatty Charlie", watch out. Even though he may not be chatty with you, he may fool around with getting your order in while he chats with one of his other clients. If your broker is one who trades a lot, he may be taking care of his own before he gets around to taking care of yours. Other considerations are: Whether or not you are able to call directly to the trade desk on the floor, and better yet, whether you can call directly to someone stationed next to the trading pit.

When calling a broker, if you are using mental stops, you should time your orders. Find out how long it takes from the time you reach for the phone until you hear that you are filled. Test this procedure in several markets on several occasions.

If you are using electronic order routing the speed at which you can electronically place an order depends upon the speed and reliability of your computer, the Internet, your data feed, your broker's computer and routing system, and the exchanges computer system.

If using the telephone to call in orders, you may want to use the "tick-in-half" rule. For every 1/2 minute your order takes * from the time you reach for the phone until you get your fill * add one tick to your mental stop. If this is satisfactory slippage, then it's okay for you to use mental stops. Time these as flash fills since your mental stops should be market orders.

These days many people use all-electronic trading. Neither the broker nor electronic order routing is involved in the trade. Fills are virtually instantaneous.

The number of trades you already have on in other markets can have an effect upon where you place your stop. If you are already pretty well margined-up, you may not be able to financially, or comfortably, afford to put on another trade with the protective stop in the place you feel right in having it. In that event, it's best to pass this trade, or liquidate another trade so that you can comfortably enter the one you are contemplating. Remember, if you overtrade, put on too many trades, you will get into trouble and have to place your stops too close.

There are other considerations that may be involved in special situations, which affect where you will place your protective stop, and whether or not you want to take the trade when you see where that stop will be.

The main point is, if you can't place the protective stop where it should be, don't enter the trade. If you truly don’t know where to put the stop, then why you are trading at all is a valid question.

I think that from the previous discussion you should be able to see that protective stop placement takes a good deal of planning and thought. It's part of what you do the 85% of the time that you are a trader.

Remember? The markets trend or swing only 15% of the time. If you like to trade trends and swings, you should be trading only 15% of the time. The other 85% of the time you should be planning, organizing, delegating, directing, and controlling. That is what a good manager does. Inherent in owning and operating your trading business is proper management.

Joe Ross
Trader, Author

This question was sent to me from one of our students: "Hey Joe! Isn’t it better to get into a trade when you know everyone else is thinking the same way as you? Isn’t there safety in numbers?"

There's safety in numbers alright. Have you ever looked at a herd of zebra on a plain in Africa? They stay together in a big group because if a lion is nearby and ready to eat one of them, a single zebra is less likely to be captured while feeding in the middle of the herd than alone.

We humans also tend to stay with the crowd in our everyday lives. It's sometimes easier to follow the crowd, especially when trading. "The trend is your friend" as they say. Well…it isn't always, especially with markets that no longer trend but instead swing.

It feels comfortable for many to follow the crowd. Many times, it appears to be to our advantage. But this kind of thinking simply doesn’t work when it comes to trading. In trading, we learn to anticipate what the crowd will do next and be the first in line to act alone, rather than wait to follow them. We need to be ahead of the crowd, not in the middle. In trading, the primary activity is buying and selling in order to make a profit. It's hard to do that if you are following or in the middle of the crowd.

Ideally, you must anticipate when the crowds are ready to buy, have gone long at a lower price than they will gratefully pay, and sell them that stock during the crowd’s buying spree. You need to be the first in line ready to sell, while everyone else is in an entirely different line, ready to join the mob as they buy. You need to anticipate the upcoming trend, and do the opposite of what the majority are doing.

In terms of methods for doing so, it's easier said than done. You've got to have an accurate assessment of momentum and be able to anticipate where profits will be taken. But from the practical point of view, you must be ready to go against the crowd and stop seeking protection by following others. In trading there isn't safety in numbers. When it comes to trading, you've got to view the crowd as the opponent, not the ally. You've got to anticipate what they are going to do, and think of a way to capitalize on their weaknesses.