The trader’s life becomes a revolving door of disappointment and frustration as they move from method to method without consistent results – the beginner’s cycle. The question becomes: how do you break the cycle?

First, stop trading if you are throwing good money after bad and you are not confident in your methods – step back and look honestly at how you are engaging the market, what is working and what is not. If you have a trading plan, revise it; if not, then begin writing one – treat your trading as a business. Focus on your goals, strengths and weaknesses.

If you have not addressed your trader’s mindset in any way, now is the time to start. If you have, but are still struggling, perhaps you need to do more. A good starting place could be reading “Trading in the Zone” by Mark Douglas. Although not about the stock market, the concepts in Mark’s book are discussed in more depth in Eckhart Tolle’s brilliant “The Power of Now”. Professional assistance such as psychologists may also be beneficial. Whichever methods you choose, the goal is to gain a better understanding of yourself and in particular whether you have any repeating operating patterns, usually subconscious, that may be hindering your trading performance.

Most aspiring traders seem to focus on short term strategies that are discretionary in nature so it makes sense that if this is the case and you are stuck in the beginner’s cycle then it may be more beneficial to focus on a mechanical long term trading strategy instead which has many benefits. If you do not yet have the skills to design and thoroughly test your own then, following someone else’s could be an option. Be sure to conduct sound due diligence on the system and provider if you head down this path. Make sure that the system is tested thoroughly, not optimised and you are comfortable with it and the drawdowns inherent in the system.

Such a system could be the Growth Portfolio; thoroughly tested with backtested and real time results made available, created and personally traded by a licensed and experience trading professional, and has various portfolio categories to choose from that suit differing risk tolerances.

Trading stocks with a longer term mechanical system allows the beginner to trade in a more relaxed manner, but importantly provides the one ingredient that is most likely missing in their trading life that will allow them to break the beginner’s cycle, and that is time. As a system like the Growth Portfolio only takes approximately ten minutes a day to administer, it frees up a significant amount of time to work on other areas of trading whilst still allowing one to trade and experience capital growth.

It takes time to work on your trading plan, to develop a strong trader’s psychology, to learn more about money management, to create and test other trading ideas thoroughly, to learn software coding and to learn about other markets. These things can be done without the added pressure placed on oneself in the expectation of immediate results. New systems or strategies can be added to the trading plan as capital allows, by which time the trader will have a much more solid foundation from which to grow.

Online Share Trading: Breaking the Beginner’s Cycle is a post from: Share Trading Articles

The Chartist employs three technical analysts who have all been mentored by Nick during the last 10 years. They are each a specialist in their own way.

Peter Hammersley specialises in Elliott Wave Principle. When Peter analyses a stock’s pattern he generally presents both a standard technical view of the chart as well as more in-depth analysis based on Elliott Wave Principle. He also looks at a time element learnt from Robert Miner, author of Dynamic Trading. When combined, both wave structure and time analysis create a new dimension of confluence to help make better trading and investing decisions.

Scott Goddard is the global markets and foreign exchange analyst at The Chartist. Scott uses pattern recognition, price and volume evaluation to determine how a market or product is expected to react.

To clarify, technical analysis is not a form of prediction. No one can predict the future and how a stock or market will perform, however we can use history to identify what may occur. As we cannot predict the future, any trade recommendations from The Chartist always come with an exit strategy or ‘stop’. We will suggest when to buy, when to sell and where to set your stops. Managing your trades is an essential element to successful trading or investing.

Craig Fisher is our resident expert on trading system design. Nick Radge and Craig Fisher work together coding and testing trading systems for The Chartist. Craig manages the signals for the ASX Power Setups®, Global Power Setups®, Growth Portfolio and SMSF Timer.

Combine Peter, Scott and Craig’s analytical skills with Nick Radge’s technical analysis, system design and trading methods and you have a stock market newsletter that is dynamic, interesting and different.

When you subscribe to The Chartist you can choose the areas that interest you. The subscription service is divided into sections: Power Setups® (both ASX and Global) for short term traders, the Growth Portfolio and SMSF Timer for long term traders or active investors and finally our charting analysis (both ASX and global markets).

Power Setups®: The Power Setups® are our short term trading systems. There is both a systematic trading system where you simply follow along, no emotion is involved. The system is computer designed and robustly tested using historical data. Alternatively we offer discretionary Power Setups® for traders who want to be presented with trading opportunities but want the freedom to decide which trades to take.

Growth Portfolio and SMSF Timer: These are our long term trading or active investment strategies. The Growth Portfolio is monitored daily and has an average trade length of around 8 months whereas the SMSF Timer is a weekly strategy that trades out to 3 years. The philosophy behind our long term investing is that we want to invest whist the market is trending up but revert to cash when the market turns down. The goal is to protect our capital during a down trend.

Charting Analysis: For ASX and Global markets. Each weekday evening Peter Hammersley offers insightful analysis on ASX stocks. Peter analyses 3 stocks and chooses those stocks whose patterns look interesting or where the stock is going through a major change. On Tuesday, Wednesday and Thursday evenings Scott Goddard analyses major global indices or commodities, such as Gold, S&P 500, Dow Jones and others.

Subscribe to The Chartist stock market newsletter: ideal for individuals and SMSF managers wanting to take control of their financial future, without the need for expensive financial planners and managed funds. The Chartist tells you when to buy, when to sell and how to manage your trades.

The Chartist: A Unique Stock Market Newsletter is a post from: Share Trading Articles

The advent of computers has seen massive development of stock trading software packages which will provide the user with price and volume data, along with a plethora of indicators which are derivatives of price and/or volume to add to the technical analyst’s arsenal. Prior to computers, any stock market chart would have been hand drawn, so computerisation has converted the practice of technical analysis to a vastly more efficient and powerful means of observing and utilising the price action of any particular market or instrument with stock analysis software.

Technicians are concerned mainly with price action. This is contrary to fundamental analysts who are more concerned with ‘value’. They analyse a companies’ performance; – management, balance sheets, profit & loss etc – and are more concerned with such metrics as earnings per share, future growth, and price/earnings ratios to name but a few. Technical analysis assumes that price reflects all that is known about a company at any given point in time. Of course, the disciplines can be combined.

History repeats in many walks of life and price action that represents supply and demand, driven by the psychology of market participants, should be no different. Therefore it makes sense to me, that analysis of historical data is really a search for repeatable patterns or occurrences within that data that may repeat in real time over and over. It is a process of stacking the odds in your favour rather than one of prediction. It is a process of utilising probabilities and statistics.

One of the great misnomers of technical analysis, in my opinion, is that it is a predictive tool. Even Wikipedia mentions it as being a “discipline for forecasting the direction of prices”. It is often shunned by fundamentalists for this ‘predictive’ reason. Personally I see no difference between a technician arriving at a buy level and profit target and a fundamentalist determining a level at which to buy (value) and one at which they will sell (overvalued).The process and ‘forecasting’ is one and the same, the only difference is the tools being used.

So choose your weapon with which to engage the markets; technical analysis, fundamental analysis or a combination. Make sure you weigh up the pros and cons of each and consider such things as; time to devote to the cause, timeliness of and efficiency in managing information or data, whether you want to hard code trading systems, reliability of information and the ability of your trading rules to be tested and measured.

What is Technical Analysis? is a post from: Share Trading Articles

During my search for career change ideas and potential businesses to start, I came across several advertisements for share trading software or stock market newsletters. I had previously had reasonable results with buying shares and holding them for a while so the idea of trading appealed to me. I decided to make trading my business part-time whilst I continued to work. After all, how hard could it be?

Initially I started share trading using fundamental analysis. I subscribed to a stock market newsletter written by a very well known broker.  Many of his trades were successful, but I was frustrated by the timing as sometimes you would sit in a position for a long period before the position moved. I also realised that to consistently read the amount of material that was necessary for this type of analysis was going to be a monumental challenge. Furthermore, I had decided that the particular broker gleaned much of his information from industry and personal contacts and to replicate that, was not possible in my world.

I then attended a stock trading seminar that was advertised and changed to technical analysis. Naivety got the better of me and I succumbed to the slick sales presentation, and promptly outlayed a small fortune for some share trading software, education and unlimited ongoing support.  Little did I know at the time that some of those who were supporting and guiding me were as green as I was, but that soon became apparent.

Short term trading appealed to me as I was looking for regular income, and so began several years in the beginner’s cycle as I explored every indicator in the share trading software package and skipping from method to method. I also began reading share trading books voraciously, stubbornly refusing to listen to those that suggested I did not have enough capital or should start off trading shares first. No, I listened to the spruikers who said I could start with not much capital, trade warrants and create an income in a hurry. I was sold, and believed, the dream.

After some good results, I even gave up my job to trade from home; I worked in an industry where I always had found it easy to switch employers so plan B was just to go back to what I was doing. Plan B was implemented quickly, as was the realisation that I knew next to nothing about money management, position sizing and my own trader’s psychology. So the beginner’s cycle continued; reading and searching for quality educator(s) to assist with my journey.

It was from addressing these areas of weakness that I became more interested in stock market trading systems; computerised systems that once coded into the software would remove much of the discretionary input from a trader.  It was soon after this, and several years ago now, that I moved back to the Sunshine Coast and came across Nick Radge and The Chartist. I had one-on-one consulting with Nick and then becoming a subscriber to The Chartist. I was confident that I had found a mentor and educator that actually walked the walk. The information contained within The Chartist, including the resource section which contains many nuggets of gold, has proved invaluable.

During my time as a subscriber of The Chartist, I also began studying in an effort to finally remove myself from the industry in which I was still employed. I had accepted long ago that I needed to maintain employment while my trading account grew and targeted the finance industry as being a logical step. Anything to do with trading would be a bonus.

Someone once told me to be open to potential opportunities coming from less obvious places – i.e. look and think outside the square. This concept was the catalyst for me joining The Chartist. So at the ripe age of forty-something I have been fortunate enough to change careers and also add another element to my trading journey. For this opportunity, I am eternally grateful to Nick and Trish Radge.

Creating change is much like trading. It requires a plan, tenacity, discipline, dedication, open mindedness, sacrifice and support. My support comes from my wife who has never wavered in her belief that change is both possible and inevitable.

Craig Fisher joined The Chartist in 2010. Craig is our Portfolio Analyst responsible for the ASX Power Setups, Global Power Setups, Growth Portfolio and SMSF Timer. Craig was mentored by Nick Radge over several years. Nick recognized Craig’s skills in technical analysis and computerised trading systems and coding. Upon completing a Diploma of Business and then part way through a Diploma of Financial Services, Craig mentioned to Nick and I that he was considering a career change. It is rare to find someone in their mid-40’s who has the tenacity to undergo a complete career change. Recognising and admiring this in Craig, we were quick to offer him a position with The Chartist. Craig is now a valuable part of our team. – Trish Radge

A Share Trader’s Journey: Changing Direction is a post from: Share Trading Articles

Unholy Grails by Nick Radge – article

Unholy Grails article in Noosa News, 20th April 2012 is a post from: Share Trading Articles

Nick and Trish Radge

A few people have commented, after reading Unholy Grails, that they had no idea The Chartist did anything other than charting analysis. So I would like to introduce you to the strategy I use for managing our SMSF: the Growth Portfolio.

The Growth Portfolio captures trends
The Growth Portfolio is a pure trend following strategy designed to keep you fully invested during bull markets and in cash during prolonged bear markets. Its unique Index Filter ensures that your capital is protected during events such as the Global Financial Crisis.

Here’s the Growth Portfolio in action. In the first video below, the strategy captured and rode some nice trends in Regis Resources (RRL). Note how the trailing stop (red line) tightens as the Index Filter kicks in. [No sound]
Video 1 – Regis Resources (RRL)

The Growth Portfolio will help you manage your trades

In Video 2, Senex Energy (SXY), note how at the 8 second mark the price has a false break into new highs above $0.45 yet the Index Filter keeps us out because the braoder market was falling, and as the saying goes “a rising tide lifts all boats. A falling tide drops all boats”.
Video 2 – Senex Energy (SXY)

The Growth Portfolio will keep you out of a falling stock

Riding the trend is only part of the game. A good defense is equally important – as we saw in 2008 when most fund managers lost between 30% – 50%. In March/April 2011 Matrix (MCE) was valued by some significant analysts anywhere from $11 – $15. Even in May as the stock dipped, many believed a great buying opportunity had been handed to them at a ‘cheaper’ price only to see the stock continue to plunge.
Video 3 – Matrix (MCE)

About the Growth Portfolio:

• Specific buy and sell recommendations
• Less than 10 minutes work per day
• Easy to manage and understand
• Can be used in a SMSF
• Use any broker
• Personally traded by Nick Radge to manage his own SMSF

The Growth Portfolio is an inexpensive way to manage your own portfolio.
At only $660 incl GST per annum the Growth Portfolio is an inexpensive and simple way to manage your own investments. Each weeknight evening you will receive an email advising if any new signals have been triggered. If so, login to The Chartist to view what to buy or sell. We also tell you how to manage your trades.

Growth Portfolio Performance as at Mar 2012:

If you would like to manage your SMSF, or long term trading, in the same way I do, then subscribe now!

How Does Nick Radge from The Chartist Manage his SMSF? is a post from: Share Trading Articles

Nick Radge has over 25 years’ experience in the financial markets, from the trading floor of the Sydney Futures Exchange, to international investment banks. He is the founder The Chartist and has written two highly successful trading books. Nick Radge will discuss:

• How to create a positive mathematical expectancy.
• Why profits are made.
• Risk management and why common assumptions may not be appropriate for you.
• Entry setups for any market and any time frame.
• Trade management.

Chris Weston will provide insights into current market movements, and discuss potential trading opportunities, including:

• The carry trade – what is it, and what may be favourable/valuable positions to hold.
• Key macro drivers – concerns and fundamental drivers for risk assets in the future.
• Indices – how does the S&P influence other asset classes?
• Commodities – their role in currency trading.
• Three of Chris’s favourite trades.

IG Markets’ Associate Director, Jason Andor, will discuss the company’s current and future developments, plus their client money protection policy and details of how they handle client funds. Tea, coffee and pastries will be available throughout the event.

The event will be held in the CBD on Saturday, 12 May and will run from 9:30am – 1.00pm.

Please note that places are strictly limited. To register your seat, please follow this link and complete the short form. IG Markets will respond with your confirmation and details of the event.

Don’t miss out on a place at this exclusive seminar – it could change the way you trade!

Free Trading Seminar – Perth, 12th May 2012 is a post from: Share Trading Articles

Over the years I’ve has a lot of fun being rude about technical analysis – to give what’s usually called “charting” its proper name.

What always sparks my doubt is that the markets generally rise or crash as a result of outside, non-market events, which market graphs can’t predict, whatever enthusiastic chartists suggest.

But now I have to haul up the white flag on this long-cherished position.

I’ve finally found someone who makes sense with technical analysis. And he spells out two important points that every direct share investor should know about.

This light on the M4 to Damascus was shone by Nic Radge, a one-time Macquarie Bank director who’s still under 40 and lives comfortably in Noosa, playing the active investor on the markets and the charting guru for clients.

His first principle should strike chords with finance professionals as well as normal investor.

The point is, there are two main types of share analysis: charting, and what’s called “fundamental analysis”, which means studying everything about a particular company from its management, profit record and capital down to its sales prospects.

The analyst then tries to work out from this information what the shares are worth. This is the method used by the battalions of analyst who work for funds and financial institutions.

For the average investor it is totally useless, says Radge, who has just published his own guide to stockmarket investment called Adaptive Analysis (Wrightbooks, $29.95).

The point is you cannot automatically believe anything company executives say.

These days the only CEO who tells the unvarnished truth is Telstra’s Sol Trujillo – and he’s got his reasons.

Others can quite rationally argue that it’s their fiduciary duty to shareholders to put the best possible gloss on the company.

But that has results which range from simple over-optimism to outright deception, on the scale of the HIH and Enron disasters.

Even the pros can get fundamentals badly wrong, says Radge and for the average investor technical analysis is the only reliable alternative.

He happily agrees it won’t predict serious problems – “markets can and do crash at anytime” – but in the long intervals between, an investor who learns to interpret shareprice graphs to reveal underlying waves of market sentiment about particular companies can trade profitably much of the time.

And here’s where the second – vital – principle comes in. It’s absolutely essential, says Radge, not only to set a stop/loss get-out level for every single trade you engage in – something this column has always urged – but make it as tight as practicable.

Tighter, in fact, than I’ve suggested here in the past.

Radge offers pages and pages of computer simulations to demonstrate that the tighter – i.e. lower – the stop/loss, the higher the overall trading profit. In effect, it means you take more small losses, but overall you make more profit.

He certainly follows his own advice. Last week he booked a buy at $7.38 with a stop/loss provision at 10 cents less (good Internet brokers will arrange this for a small charge).

That’s a stop/loss reserve of 1.3 per cent.

All this might sound like a lot of work, and it does admittedly involve checking the markets everyday.

But there is affordable share-management computer software on the market, such as Maus Stockmarket and the latest version of Quicken Share Analyser, which will quickly download share prices from the Internet, provide the necessary graphs, and create the all-important stop/loss programs.

With that in place, you don’t have to worry about a re-run of 1987.

The technical analysis will have told you it’s happening – the stop/loss program limits your problem – and you just stay away for a while.

Technical Analysis Does the Hard Work is a post from: Share Trading Articles

The term ‘mechanical’ is used when these trading rules are programmed into trading software that will generate the buy and sell signals for you. Being able to program your trading rules enables 5 key benefits to improve your profitability. These are:

1. The ability to test the trading rules on past data to analyze profitability and efficiency
2. To ensure the consistency of the approach
3. The elimination of emotion from the decision making process
4. To enable risk and money management techniques to be adhered to
5. To test ways to increase the overall returns

Whilst many traders or investors baulk at a mechanical trading system, feeling they are not competent to do such programming, it is common practice amongst professional traders. A mechanical trading system allows you to understand what will occur in the future based on what has happened in the past. This is termed ‘backtesting’ and is what gives the professional trader his or her confidence to execute trades with little effort or further thought.

When designing a trading system, the most important consideration is your own personality. You must be completely at ease when you participate in the market or it will be very difficult to follow the trading plan thus switching techniques and causing losses. Personal considerations to take into account include:

• Time needed each day to trade
• Your need for action or interaction
• Stress and anxiety levels
• Capital restrictions
• Natural tendencies (i.e. contrarian)
• The need to be right or wrong

Whilst your best friend may be a successful day trader, your emotional make up may not allow you to be a ‘fly by the seat of your pants’ trader. You may feel more at home taking your time and assessing more strategic opportunities, using technical analysis to visualize a trade.

In order to assess your make-up, it’s important to know the nuances of various systems. Most systems will fall into either the short term trading or long term trading categories and as a result similarities start to appear within each grouping. These tend to be:

Once the length of the trading system is chosen, it’s then a matter of selecting the variables that generate the signals and dictate the money management techniques. Here is a simple flow chart that may represent an example of such variables. It’s best to work backwards and define the output first. New traders should aim to simply make money as an output as opposed to attempting to make a specific amount of money or return in any year.

The most common question I get asked is “Where do I get such a trading system?” Many books and trading forums (try The Chartist trading forum) have creative ideas. I tend to always be on the lookout for new ideas to test and run through my trading software. Most don’t register any startling results but occasionally you will come across a gem. I have several techniques that I stumbled upon that generate nice returns, but I would not have traded them unless I programmed the system rules and tested the results.

Of course you can always buy from a vendor, but this presents several dilemmas. Firstly, are the results true or have they been ‘optimized’ to show profits that perhaps could not be achieved in real time trading. Many systems have been designed with hindsight and will not work in the future. Always ask the system seller if they themselves trade it, if not why not, if yes, ask to see their trading statements.

The second issue is a matching of your personality to the system. Usually a system is built around the vendors’ personality, not yours. An example would be a trend following system that, although very profitable, may leave large profits on the table. If you felt uncomfortable about this, you may be tempted to over-ride the system rules to ‘enhance’ the results. This is a recipe for disaster and is generally why such “black box” systems get a bad name. If the vendor is credible, trades the system and it fits your personality then it may well be worth the money.

Lastly, be cautious when a system gives great results. Always try to disprove the final results and find a flaw. Do not get overly focused on great profits, look for problems. Has it only been profitable because of a recent bull market? Has it only been profitable because of one large profitable trade? Has it been optimized, that is fitted to past data with no reflection of what the future can hold?

We tend to overlook various parts of our historical testing. In real time we tend to succumb to our emotions. In my view, a mechanical trading system can only tell the truth. A back-tested trading system that shows robust returns can easily be traded in real time and with relative comfort, especially when it has been designed from the ground up with your own input. A small investment into systems software can make a huge difference to your future as a trader.

Useful links:
Amibroker trading software – www.amibroker.com
Amibroker coding – www.amibrokercoding.com
Long term trading
Short term trading
Stock trading forum

How to Design a Mechanical Trading System Using Technical Analysis is a post from: Share Trading Articles

Before moving on, I would like you to ponder this table:

Although this table is usually used to show the importance of money management, it can also be used to show the unimportance of entries. Trader 3 can make just as much money as Trader 1 even though the winning percentage is only 25%. It can also be a fair assumption that most profitable traders use completely different entry techniques. Based on the assumption that entries are not the common denominator, what is it that then that makes them profitable?

The basis of profitable trading is two-fold:
1. The average dollar win is greater than the average dollar loss, and
2. Wins outnumber losses

Generally speaking, the shorter the trading timeframe the closer the average dollar win/average dollar loss ratio. An example of this type would be day-traders. They risk $1 to make $1. They have the ability to quickly exit when the trade moves against them and generally with this speed they are able to win more often than not. In fact, to have an average dollar win/average dollar loss ratio of 1:1, you must get it right more than 60% of the time in order to make money. I can assure you that winning at this rate is difficult, and in fact a more realistic rate would be closer to 40 – 50%.

Therefore, by increasing your average dollar win/average dollar loss ratio to say 4 or 5:1, you could then expect to be quite profitable assuming a win rate of less than 40%. Very quickly the association of profitable trading with a high probability entry system is reduced dramatically.

That assumption aside, how is it we can achieve an average dollar win/average dollar loss ratio of greater than 4-5:1? This is where trade management becomes important. Trade management is made up of money management and exits and is critical to increasing profits and decreasing losses.

Using technical analysis we can define four basic forms of exiting the markets effectively:
1. The Initial Stop
2. The Breakeven Stop
3. The Trailing Stop
4. The Exposure Stop

The Initial Stop

All types of businesses require an outlay of some description in order for profits to be generated. Trading is no different. You must be prepared to risk money in order to profit. The secret here is to limit those risks and keep them as a fraction of the potential profits. The initial stop limits our losses if the trade goes immediately against us and also serves as a trigger to act automatically. The stop should ideally be placed at a technical level, i.e. below/above support or resistance. The stop level should be a part of your trading system and not a random point that differs on each trade. The stop level is arbitrary to some extent, but it MUST be placed.

• Always place the initial stop prior to entering the market, and
• Never adversely move the initial stop after placing it

The thought process at this stop level can influence people in many different ways. The one over-riding mindset is to remove the stop altogether and hope the market will return to our entry price and let us out without a loss. I can guarantee that your mind will negotiate as hard as possible with you to move this stop a little further away. Moving your initial stop in the belief that a reversal is apparent is a sure fire way to increasing your average dollar loss. An increase in the average dollar loss will destroy profitability on any trading system. Cut your losses, cut your losses, cut your losses…

The Breakeven Stop

It’s very easy to make trading a two-sided equation; accept a loss in order to make a profit. However, the next step is to protect our original capital before thinking of the profits. Once our capital is theoretically protected, we essentially have a free trade. A free trade is theoretically ‘free of loss’ as well as ‘free of anxiety’. If you can conceptualize that the trade will not lose any money, then you may learn to accept that it can now move freely into large profits and without your emotional input. You should become more patient with the trade now that the risk has been theoretically alleviated.

• Move the initial stop to breakeven (commissions included) once the market has moved twice the distance of your initial risk

Example: Long the SPI at 3010 with an initial stop at 2990 (20 ticks). Therefore, once the market trades to 3050 (2 x 20 ticks), move your stop to 3010 to protect your capital. You are now free to let the market move without the fear of losing your own money. By letting the market go twice the initial risk, we are making sure that a false break or normal market noise will not prematurely take us out of the trade.

I can see you’re now saying “you’re kidding Nick, with the SPI at 3050; I’d be taking my well earned profit!” Let me assure you, the only way to get a reward to risk ratio of > 5:1 is by giving the market breathing room. You will never make large profits by taking small profits.

The breakeven stop has a second component:

• Move your initial stop to breakeven, or as close to as possible, after 4 days

Does the word “hope” ring true to anyone here? Professional traders don’t have “hope” in their trading toolbox and nor should you. If a trade does not perform within a preset time frame, move the stop to as close as is possible to breakeven. You are effectively forcing a result; your stop being hit resulting in a smaller loss, or the market moving in the desired direction. Either way you get a result and more importantly, those rubbish trades don’t end up in the “hope” file in the bottom drawer. Don’t tie up your capital on non-performing trades. Get a result or get out.

The Trailing Stop

“You will never go broke taking a profit”: possibly the most incorrect piece of advice I have ever heard. Unless you have a win rate of greater than 70%, taking small profits will mean that you will tread water for a very long time and possibly make you gear-up your risk to dangerous levels. You can make large profits with small risk by following the weekly trend. You just have to stay on that trend as long as possible. If you take consistent small profits, you will never allow yourself to make big profits. You only need make few large profits per year to be a highly profitable trader and the only way for this to occur is using a trailing stop to follow the market up. Nobody can predict the future. Prediction is an exercise in ego. Those who sell themselves as “Guru” forecasters are generally hoaxes with no statistically sound trading record and those whom follow without regard for sound trading principles are blinded by their own ego. Listen to the market and go with the flow of the market. Most great traders are trend following in nature.

So, how do you follow the trend?

I will outline two methods; one for share markets and one for commodity markets. Why the difference? Sharemarkets tend to “backfill”, that is, they tend to move in fits and starts. It’s important in these circumstances to be patient and go with the ebbs and flows. This ebbing and flowing is simply minor swing highs and lows within the overall weekly trend. Consider this chart:

NAB: Daily

In this particular chart, the large uptrend is plainly evident. It’s also easy to see the market ebbing and flowing within the trend. Getting into tune with this price action using the swings allows a mechanical way to follow the market and allows profits to be maximized in line with the trend. The swing highs are identified with “H” and the swing lows with “L”.

Very simply, when a market retraces from a swing high (H) to a swing low (L) we have the setup to move the trailing stop up. Once the preceding swing high is broken, move the stop to 1 tick below the swing low (L). In the above chart, this would have been done eight times. Each time H was exceeded, the stop got moved up. We are tuned in to the ebbs and flows of the price. In reality we have no preconceived notions on how high it can go and therefore we are just along for the ride.

The next method is generally used in faster moving markets such as commodities. In these situations the markets tend to have prolonged moves without retracements. By applying an exponential moving average, we can track the faster moving markets and at the same time give them some room to move. The difficulty herein lies in your personal appetite for leaving profits on the table. If you have a low tolerance, use a smaller lookback period, say 7 to 12 days. If you are very comfortable giving the market breathing room, use a slightly longer period, say 15 to 20 days. Don’t kid yourself here: we are looking for bigger moves and as a result we must allow the market some room to move. Consider this chart:

Lumber: Daily 15 EMA

You can see the risk reward payoffs using this method. This is what I personally use when trading futures. The important thing to remember is that the same length EMA must be used on all markets. Changing the length effectively changes the chart to fit with your current emotional stance. By using the same length lookback you are automating your trailing stop regardless of the data. In this way you are then able to quantify the effectiveness of the trailing stop and the impact on the overall efficiency of the system as a whole. Using Trade Efficiency calculations, you can obtain accurate data on how much profit you are actually making based on the total move. Remember, we are using hard statistics to determine the effectiveness of the trailing stop, not our emotional responses.

The Exposure Stop

I have covered almost all market situations; an immediate move against your position, a non-moving market and a trending market. An area almost always overlooked is the definition of a windfall profit. Why is this important? It’s normal for the amateur trader to get anxious when making money and even more common for them to take the quick profit whilst its there. Let’s face it, it may disappear right? Wrong! As mentioned above, you will never make large amounts of money by taking quick profits. However, if we carefully define a windfall profit in relation to our account equity and position risk, then we can prudently capitalize on explosive moves. It’s prudent to do this because after an exponential move caused by fear and excitement in the market, there is a high probability that the market may retrace just as fast. This method will smooth your equity curve and lower your anxiety because you are prepared to act upon any price action.

I personally define a windfall as 10 times my initial risk. That is, if I risk ½% on any trade, it must go above my trailing stop by 5% of my total account equity. It rarely happens but it can happen. Here is one such move:

I personally define a windfall as 10 times my initial risk. That is, if I risk ½% on any trade, it must go above my trailing stop by 5% of my total account equity. It rarely happens but it can happen. Here is one such move:

Exit 1 was a function of the trading program. Entry 2 was a function of prudent money management. I defined the distance that the market would have to travel that would return 5% on the account. As you can see it was a fairly decent move. The calculation must be based on the risk of the trade and the percentage return on the account. Define a windfall profit to suit your own personality but don’t kid yourself. It shouldn’t happen on every trade. If it does, your risk is out of proportion to the profit or you are falling into the trap of taking the quick profit.

An important rule is to consider why the market has made this move and then consider the consequences. If a major change had occurred which will dramatically affect the underlying fundamentals, it may be prudent to only take partial profits. If the above move were because a tornado hit Florida and destroyed the Orange Juice crop, I would not have taken any profits. In that instance, Orange Juice could’ve only gone one way! However, what actually occurred was a rumored crop report that had no substance. The market has just pre-empted a bullish report and a combination of excitement and stop-loss orders created an exponential move. My trading plan involves these criteria and I acted according to that. A simple, yet prudent, rule.

In summary I have used technical analysis to outline what appear to be simple rules. When applied correctly and with discipline the trading process becomes more controlled and therefore decreases anxiety. You have the ability to react to any situation that occurs because you have prepared for that situation. We have taken the process of high probability entries away and therefore the need to be correct. The need to be right or wrong should not be included in the trading process. I don’t trade to be right or wrong and being wrong does not bother me. I trade for profits. Trading with the trend and prudent exit criteria allows profits without the need to be right more than 40% of the time.

Technical Analysis: Essential Exit Rules is a post from: Share Trading Articles