The Trader's Academy - by Traders for Traders

Greetings cat. In December, I have read the entire thread, and took many nuggets of wisdom from it in one file.


This issue about risk managament is very well explained in "PRINCIPALS AND PSYCHOLOGY OF DAY TRADING" by George Slezak, a short 48 page material by one of the former floor day traders. (to anyone interested in this, use google, easy to find - one of my favourite, written by true trader). While position trader would use one lot, because his risk is big, scalper will use 20 lots, because his risk is small. Took me a while to understand this. One of the reason many fail is also switching loosing day trade to "position". I have seen this with other traders too many times.

Slezak: If you convert a scalp or day trade into a position trade, by definition you did not consider the risks of the trade.

The whole thread...Wow, that's keen! Glad you found it useful, and thanks for the George Slezak pointer, I'll check him out.

I've copied this from my ' big secret to trading success' thread, so apologies to those who have already read it some time before, but if you haven't you may find it useful....

Why do so many traders persist in entering positions trying to capture the top or bottom of a move, against the run of the market and neglect those that go with it?

It is a question I have addressed above, but I do so again because every single trader that ever there was has been or still is guilty of it.

The logic, I think, goes like this :

The market falls heavily, and let's say that because it was off the London open, it was a very fast move and so difficult to catch. It falls because almost always, except for occasions when market moving news has been released, there is a clear technical reason why the money is flowing into the short side and not the other way round, although the London open is a notoriously dangerous time to trade, but often very profitable if you get it right.

Then support is found shortly after the initial down move ( there is usually a reason why this support has held, be it a moving average on one of the time frames, fib retracement, pivot level, or combination of these.) the price rises, and some traders, recognizing the support level, may have already bought. Then a level of resistance is reached, and the price stops rising. Those already in on the long side hold on in the hope that the price will continue to rise. Those not yet in either way think about going short as the price begins to roll over but don't because they fear that they will be selling into a market that has already turned, or rather, psychologically they see the price as neither at the top or bottom so they do nothing, feeling that the place to sell was above, and place to buy was below. They are caught by indecision and doubt. In fact, this is the very place a trader should be selling, after a pullback, with momentum on their side. But most don't do this, because it is a much easier decision to make when the price is what is considered to be at its low or at its high. If you're right, the price can go a long way, so in a trader's own mind the risk/reward is so much better than if he/she enters on a pullback when, because the price has already moved well away from its low or high, it somehow seems less attractive.

Then there is the stubbornness of a trader, that inner voice that says " I've missed the move, so no point risking money now by trying to jump in...better wait until it finds the bottom and go long "

This mentality is fatal for trading. The price always pulls back. Wait until it does, use your TA to determine whether it is likely to resume the directional move, and at or close to the point of rollover, trade with the overall momentum. Do not make the mistake of thinking you are mistakenly selling what is a rally pull back, because if momentum is on your side, it won't be, it will be a resumption of the initial move.

Remember, the markets love to fuck with our minds. They feint long when they are about to plummet south...reverse direction only to do so again, and generally make it extremely difficult to know where to get into a trade and even more difficult to know when to get out of one. No wonder so few succeed.

But there is a way. Learn all these tricks, and learn them on only one or at the most two forex pairs or indecis, because any trader who really knows how to trade will harvest more than enough pips in any one day off of just one pair.

Picking tops and bottoms can be done, more easily so if you are very good with your S&R levels and your SL is wide enough for the adverse moves that typify areas of directional change. But these areas offer the greatest risk, and they are where most traders get killed. Far better to trade pullbacks aggressively in the direction of the initial move, using a counter-trend line of you can get one in.

Hope that's not too much waffle...I know that trying to explain technical detail without the use of charts can be futile, but I have also tried to explain why so many traders fail to trade the pullbacks and opt for directional change instead, so hopefully, I have made at least a slither of sense.

Oh, and one last thing. Don't be afraid to use time frames smaller than 1 minute, though one minute can be small enough. This is because the finer detail you need to see to recognize when the price is about to resume the trend or momentum, can only be seen on the smaller time frames, and by smaller I mean anything down to 10 seconds, and anyone who says that it is impossible to trade such small time frames, and there are many, has either never done so, or simply doesn't know how to. If you have a small account, then you have no choice but to trade them, unless you want to blow your account in a handful of losing trades because your leverage was too high.

My method of trading is statistical arbitrage where one identifies short term mispricing in the market. So I am always trading an instrument that is either over or undervalued and hence offers value. To enter trades I will still however use price action, volume and delta analysis and identification of wholesale price levels.

In addition to which I will also add in sentiment and fundamental analysis to create a narrative and layer up the reasons to take the trade and adjust my position size accordingly. So a 1/4 position for 5/10 trade and full one for a 10/10.

I would like to contribute to the thread where I can.
The value models to identify mispricings are proprietary information so wont be able to go into that.

Dollar basket looks to me to be putting in a top on the weekly, which wouldn't be a surprise as its very over extended. This will have implications right across the board, obviously bringing the $ and US/European stocks down, the euro.sterling up. Keep an eye on it, we could be a t a pivotal juncture in the markets. Time will tell.

I agree with this. Picking tops and bottoms is very difficult to do if you cannot value an instrument. Price action in these areas is opaque for the reason that the institutions dont want retail traders competing with them for liquidity and will run stops, push the markets back and forth to put on size and often create a pattern of higher highs high lows to create the impression that the market is going to go up when value is below the market. This is what creates the accumulation pattern as they encourage retail traders to buy when they are about to go short. Weak handed buyers / sellers in these areas get taken out and the big boys can get decent size onto the market.

You can however use price action with a higher degree of success on the pullbacks. Look for price compressions into a level with decreasing volumes for a high probability trade.

Nice sell trade from the 23rg Dec on Dax. I've marked it so it should be self-explanatory. The drop came after a period of sideways chop which would have discouraged many traders, but you can see that all the time it is narrowing into the apex of a pennant. For me this was always going to drop, the difficulty was waiting for the right opportunity, made easier by the narrowing of the 100sma into the 20sma ( blue/red ), and the fact that the zero lag positioned over the top made this a high probability trade, despite the pa mess beforehand. You just have to be very patient with a trade like this, and trade on the signal candle when it appears in the right place. SL above the zero lag ideally.

haha...I posted it and then saw that half the caption has been cut off, but it says...." as the two mas get closer, the selling pressure increases...........is not an MA I use........"

Bit more on pullbacks.

Say in an uptrend the market comes to a potential top and sellers come into the market. None of those sellers are going to be in profit.
The buyers will have all the profits so the sellers are weak handed. It will be easy to turn the sellers over and run their stops. This is why top edges are often gamed.
Now with pullbacks on the downtrend the reverse occurs. The sellers are strong handed and the buyers are weak handed.

and time is telling, 180 pips so far,246 from the high, though I think 10,100 could well see support, albeit perhaps temporary.

H5 and Daily Dollar Basket charts. On the H5 as long as the price remains above the 200ema, the uptrend can be seen to be prevailing, and if there is no sign on the bigger Daily chart that this uptrend is under threat of breaking down, such as Diversion, then it is usually safe to buy off of the 200ema and expect higher highs for a good holding trade. But when there is an indication of a weakening in this trend, it is nowhere near as safe to buy and hope it runs higher. As you can see, we have big Daily diversion now, and so the likelihood that this will only be a pullback at the start of a more prolonged down turn than the one we have just had is far higher than it was before. If so, the euro will continue rising against the dollar, as will pound sterling, and US and European stock indexes will fall. In fact, I already have a high on the Dax and the FTSE, meaning that I do not expect them to go much higher over the next few weeks. I could be completely wrong, but as all traders should, I am looking ahead to see what may be in store.

Once you accept – and I mean deeply accept, at the emotional level - that this is a game of
SLIGHT statistical edges, you are on the road to large profits. In effect, you are becoming the
house in Vegas. Did you know the house in Vegas only wins about 53% of the time – and they
make billions!

So, get your head straight, and care only about one thing: your NET results over a period of 10
to 20 trades -- not after 1 or 2 or 3 trades! Don‘t let your emotions screw you up.
So long as your methodology and psychology are strong, you will consistently, over the
course of a day, week or month, depending upon your time frames, bank substantially greater
profits than your losses.

Why are losses so hard to take? Because we are conditioned to take them personally. Our culture
taught us, mum and dad taught us, teachers and sports taught this lesson: if you lose, you are a loser.

And this is why most traders can‘t make it!

You see, after losing, unless we've trained our deep inner minds to instantly delete losses --
unless we have the steel ball mentality of not caring about a loss or two – of not taking things
personally – our emotions get powerfully involved. And once you start trading with emotions --
you're going to lose!

Because the market is masterfully created to swiftly suck the money out of the hands of
emotional traders – and amply rewards those who trade calmly, peacefully and with
ironclad discipline.

If you're looking for a forex pair which offers loads of pips and clean moves, try GBP/JPY - the best pair to trade by a wide margin in my opinion. It has a fearsome reputation but for me this is unwarranted. It simply gives the best bang for buck in the business with a relatively low spread - 3.5 is normal.

effectionatly know as wild thing....truly a great pair to trade

Not even that..compared to the Dax or the Dow of late it's positively serene, though 100+ pip moves all day and night are the norm.

Best bang for the buck?
What's your formula?

To compute "bang", you have to account for margin requirements, spread and range mode (not average range because it is skewed).
More for the money can be had with NZDUSD due to low margin requirements.
You can buy more NZDUSD for the money.

Simple - the moves - eg GJ 70 potential pips one way this hour - NZDUSD 32 one way. Slightly more risk as GJ requires a wider stop, but whichever way you look at it, its better bang for buck. I'd say NZDUSD is one of the better pairs to trade, but it cannot be compared to GJ. Margin requirements shouldn't enter into the equation, you have enough in your account to trade or you don't.

Daily ATR:
NZDUSD - 78
GJ - 187

Most of the pairs I trade are between 0.5 to 2.0 pips spread max, GBPJPY does often swing around btween 2 - 2.5 pips with my broker.
The cost of trading is important as well as the typical daily moves, but more importantly get to know the "personality" of the pair
that you are trading, is it a "wild thing" and can you handle it ?

Sure, spread for those still learning is important, as is the personality of the pair, so a pair like NZDUSD or EU are going to be more suitable for someone who is still learning the markets, but after you want a pair that really moves when it does. Spreads around the 1-4 mark are irrelevant because whether you're on a 1p pip or a 4 pip spread, a bad entry is still going to be a bad entry and will get stopped out on either. The bigger spreads and the pairs with the highest ATR will require a larger stop loss, but I'd rather be capturing 60 pips off of a 15 -20 pip SL than 30 pips off of a 10-15 pip SL. That's the difference. You need to make winning trades net significantly more per trade than you risk. You can do this with the likes of GJ or to a lesser extent GU, but it is much harder to do it with the more sluggish pairs like EU. In fact, I'm always amazed why so many traders gravitate to them...I think its more herd mentality than anything else.

It is about not having enough.
It is about how much you can get if you go ALL IN.

Going all in the the only way to trade as far as I'm concerned. I'll add to positions but I'll never scale out. " Get in, Punch hard, Get out " - Group Captain Adolph Malan, RSAAF.