High-Probability Trading

Strategic Next Actions

Risk more capital with high-probability trades: those trades made in the direction of the weekly timeframe trend.
Continue to acknowledge that your discipline and patience are two characteristics that provide your trading style with an edge.
Continue to be selective about what trades you choose to take.
Continue to experiment with focusing on technical analysis whilst ignoring fundamental analysis.
Continue to learn in 2 years (May 2024) what the average trader would need 5 years to perfect.
Consider developing your trading and technical analysis professionally: join ‘The Society of Technical Analyst.’
Continue to practice taking (mastering) small trading loses.
Stop carrying out numerous trades, instead, consider focusing on 4 trades only that are uncorrelated.
Continue to acknowledge that you intend to trade for the rest of your life.
Remember that Involgize Capital is about what you are becoming as oppose to anything you get in the future.
Start rating all of your trades between 1-5 when completing your trading journal.
Continue to build your Third (trading) Brain.
Consider learning more about, and practically applying, the Fibonacci and Elliot Wave to your trading.
Continue to not recommend trading to others unless they are willing to make a lifelong commitment.
Continue to not recommend trading to others unless they are committed to becoming disciplined.
Start taking long and short trades that hedge your positions.
Continue to use the stochastic RSI on different timeframes to identify high-probability breakout trades.
Continue to use the Ichimoku with trend lines to identify high-probability breakout trades.
Acknowledge that the steeper the trend line the more likely that the price action will break it.
Remember that trends will go on for as long as they want too (always focus on the technicals).
Start, intentionally, using the RSI when carrying out technical analysis on all of your charts.
Remember that, as a rule of thumb, if the price action breaks out of a congestion area the move will be about the same length as the congestion area is wide.
Be attuned to the fact that when you make limit orders you want the price action to be moving towards you in light of your analysis of the larger timeframe.
Be more willing to enter clearly trending markets (green Kumo Cloud) that have pull backs to the 20 day moving average or the Tenkan.

Strategic Learning Points

Strategically, I grasped the vital point that we need to “… be able to tell the difference between high and low probability situations” if we intend to master trading profitably. And high-probability trades are those trades made in the direction of the major trend.
Reading this text has allowed me to appreciate that I have, already, learned and apply many of key characteristics that are essential for trading profitably. And that I have managed to do so without having to, first, blow any of my trading accounts. This suggests to me that I may have an above average level of discipline that may be providing me with a trading edge.
My current experience seems to be supporting the assertion that it is the most selective traders who are also the most profitable.
Knowing how to read charts (technical analysis) seems to be emerging as the most important thing to be knowledgeable about (overall) in order to succeed as a trader.
This text reminded me that becoming a good trader is like any other profession. It will typically require that we spend about 2-5 years learning and gaining practical experience trading in order to develop unconscious competence. In this respect, it may make perfect sense to join The Society of Technical Analyst in the name of my continuous professional development, and forming a marketable identity with social capital immediately. Additionally, this also seems to confirm that I have taken the right approach to developing as a trader: spending the first year or so strategically reading, learning, and applying everything that I understand to trading. Then, informally, setting up Involgize Capital (my Third Brain) to house and structure my growing trading experience. As the writer states, the first year or two is not a time to try to make a killing. Rather, it is all about learning how to trade by preserving our capital (precisely the approach and mindset that I have been applying).
Reminded that trading is an ongoing learning process that cannot be learned overnight by reading a book or going to a seminar, it seems like it is definitely something that lends itself to my specific strengths of being a strategic learner. Also, because it requires hard work and experience it appears to be suited to my orientation of being very methodical and systematic.
The writer recommends that aspiring traders read voraciously and, after 15 years of trading, he still sets out to learning everything that he can about trading. Again, it is for these reasons that I concluded that trading may be the best profession for someone with my abilities and inclinations. Currently, my third brain seems to indicate that this may totally be the case.
“From everything I’ve ever heard, read, and seen, a trader needs about 3 to 5 years to get through the learning period.” Taking into account the following… (1) I have read about trading (and finance in general) over a 10 year period prior to actually carrying out any trades… (2) arguably, I have the ability to read and apply knowledge faster than average… (3) arguably, I have an above average ability to determine what trading knowledge should be focused on and ignored… (4) arguably, I have more discipline and self-control than the average person… (5) I have created an innovative learning system (Second and Third Trading Brain) that should provide me with a unique trading style and an enhanced trading ability… this may mean that I would only need half the time to learn how to trade in comparison to an average person? Can I reduce what would take someone 3 years to 1 year? Or what would ordinarily take 5 years to 2 years? Confidently, I think that I can. This is because I would bet on myself knowing precisely who and what to focus on (strategy) to accelerate my learning process. If correct, then this would suggest that I have about another 6 months to go to complete a 5 year learning process!
Further to the above point, an interesting thought experiment for me is… can I make five years of trading experience be equivalent to an average person’s 10 years? Or better still, 1 year be the same as 3 years, and 3 years be similar to 9 years (completing the learning process in 1/3 the time in the same proportions to my condensed book reviews)? In reflection, essentially, I think this is exactly what I have unknowingly been doing (which I have appropriately called Involgize experiments). Hence this is maybe why, as of yet, I haven’t needed to blow a trading account to learn how to trade?
“… losing is part of trading, and losing properly is what makes good traders better.” Intriguingly, it has taken me a while to get used to the idea and experience of losing whilst trading. Along side my practical experience, this book has definitely helped me in this respect. And it feels satisfying to now acknowledge that I have made a lot of progress in this area since the last time I realised that it was one of the trading weaknesses that I possessed.
“Keep it as simple as possible, trade only a few markets instead of trying to jump into every market or stock. Get to know how certain markets act before you start to spread yourself too thin.” In light of this sound advice, I really do need to stop putting on multiple trades that are all correlated, because all that I am actually doing is making one big trade in several different places (idiotically making this one big trade unnecessarily difficult to manage). Instead, what I need to do is put on several trades in markets that are not heavily correlated like Gold, Oil, Natural Gas (commodities), Stocks, Bonds, and (re-visit the book “Intermarket Analysis” in order form a trading strategy that emphases non-correlation).
“When one gets into trading, it should be not for a year but for a lifetime.” This is exactly the reason why I decided to become a trader (due to my future timeline).”
Reminded that Involgize Capital may be considered extremely important in the respect that it’s has been about me becoming something not because of the system, or my immediate environment. But because I choose to educate myself. Therefore, the choices I make are truly more liberating in nature, and not heavily confined or influenced by the prevailing forces within society.
I really like the idea of rating my trades between 1-5. If I rate the trade a 5 in terms of probabilities, then that would suggest that I should enter these trades with more capital at risk. It will also be good to see how well I do making the actual assessments, because this is what becoming a highly profitable trader is going to come down too (knowing how to identify the difference). Currently, I would say that I know how to identify a high-probability trade in terms of…. (1) the 4 hour and daily stochastic RSI being aligned… (2) the weekly and the daily stochastic RSI being aligned… (3) the breakout of the lagging span and the price action through a Kumo Cloud… (4) the breakout of the lagging span through a trend-line… and (5) trading in the direction of the DXY or US10Y weekly trend. It looks like, unknowingly, I already know how to identify high-probability trades!
“Keeping a journal is like taking class notes; it should be reviewed on a regular basis if it is to help. Just keeping one isn’t good enough; one should go over it carefully to see where one’s strengths and weaknesses lie. When you start reviewing your trading performance, you can begin to get on the right track.” I would go even further. Without creating some sort of trading journal, or place to take and keep notes, then no real learning (long-lasting) will actually occur (book: “How to Take Smart Notes”).
“Many professional traders go through extensive training before they are expected to succeed. When I started trading equities, they told me that they expected all new traders to lose for the first 2 years.” Seems like I have created a good learning process for myself, more than I previously realised.
Facts: people who have attended elite institutions, typically, tend to be better learners than those who have not. So imagine what a fully trained Involgizer can do?
“People need to have enough capital to survive as they learn the ins and outs of trading. A $5000 account will probably not be enough to give a trader a chance to succeed.” This book was written in 2003. How times have changed. With no commission online trading like eToro, and $10 minimum trade orders, a person can now use a $1,000 account to trade like they had $100,000. Therefore, a significant barrier to learning how to trade using a money management plan has been removed. There is now no longer a reason for a person to use a demo or paper account if they have sufficient discipline. They can now risk as little as a dollar per trade (for one to two years) until they have develop an unconscious competent trading ability.
Surely, the Average True Range of a market is just about looking at the length and volatility of the Japanese candlesticks over a period. In other words, it’s about being able to distinguish genuine price action movement from market noise.
Strategically, it may make sense to have a working knowledge of Elliott wave analysis and actually learn to apply the Fibonacci (especially when trying to assess new possible market highs)? “The levels at 61.8 percent or two-thirds are considered the breaking point of a trend. If these levels break, the major trend is over and then a new one is beginning. The trend usually continues if the price action reaches 38.2 percent level (1/3) then continues.
Today, it seems not much has changed since this book was written 20 years ago. Many traders are still just lucky traders. Meaning they never, actually, learned how to become good traders. Therefore, the result is that in time, they will just end up giving back all of their luckily acquired wealth to the markets. The truth is that the majority of wannabe traders will, in time, fail. Thus continue to be slow to recommend trading to others.
Taught the importance of balancing out my long positions with shorts and visa versa. Also learned the significance of making multiples trades using as many uncorrelated assets or markets as possible.
Reminded that being brilliant at technical analysis is a barrier to entry as it requires a lot of hard work, consistency, and experience in order to perform well. Therefore, inevitably, it will also provide traders who are proficient with it use a trading edge.
This text confirms the using of the weekly and daily timeframe to ascertain the direction of the overall trend.
This book suggests that when I was experimenting with scalping, I was right to draw the conclusion that it would be important to scalp in the direction of a larger timeframe (the 4 hour).
“When you get opposite signals, it is a no-trade situation as in effect they cancel each other out.” This confirms what I have always observed in regard to the stochastic RSI when the 4 hour moves in the opposite direction to the daily, or when the daily and the weekly are moving in contrast.
“One thing you can do is put on a portion of your normal position when you get a signal in a shorter time frame. If it is working and you get a signal in the next time frame, add to it; if you later get another signal in an even higher time frame, add to it again. By doing this you can build into a position and get onboard early to catch a larger part of the move.” This is definitely something that I am going to experiment (at some point) with doing using the 4 hour, daily, then weekly timeframe.
The writer made a key point: the more steep the slope of a trend line, then the less likely that it will hold. Logically, this would apply irrespective of whether the price action is declining or bullish.
“One year later many of these stocks were trading below $5 per share with little hope of recovering. The big lesson I learned here was that a market is never too cheap or too dear. Trends will go on as long as they want to, not to a price one thinks is too cheap. A trader needs to pay attention to price action, not opinions.” This part of the book, unintentionally, confirms the primary importance of technical analysis. Fundamental news creates psychological biases that affect our trading acumen and judgment.
“The ADX does not tell you the direction of the trend; it only tells you if there is a trend and measures how strong it is. The ADX looks the same for either an uptrend or a downtrend. The higher it is, the stronger the trend is.” Due to this book, I looked into using the ADX, but did not find it very useful in light of my other indicators.
When volume picks up just as a market spikes, it means everyone is rushing to get in and soon there may be no one left to buy, and so the market could easily sell off if there are no more buyers.
Reminded of the importance of the 50 line when using the RSI. It may signal the start or beginning of a new price direction when the RSI stalls in the middle, or it could signify the continuation of the current trend if it is crossed. The RSI is also important in terms of the showing bullish or bearish divergences (I have already been using it solely to carry out this type of analysis on the weekly, daily, and 4 hour timeframes).
“One of the best ways to use stochastics is in cahoots with trend-following indicators.” This is exactly what I am doing when I use stochastic RSI and the RSI with the Ichimoku.
“A rule of thumb for when a market breaks out of a congestion area is that the move will be about the same length as the congestion area is wide.” This is an extremely valuable insight, which my current experience suggests is accurate. Therefore, if the market does break and travels the expected distance of the previous range, I will now be looking for a place to get out instead of getting greedy, hoping for more.
This book made an excellent and crucial point: it is easy to get our limit orders filled if we take a position when we anticipate that the market is due to pull in on the higher timeframes (something for me to definitely be more attuned too when trading).
Enabled me to really appreciate that when the stochastic is in a overbought or oversold position, then this will increase the likelihood that the price action will be affected by the proceeding resistance or support area.
“The rewards in these cases can be explosive, as was the case when the market broke Trend-line B, and the risks are minimal, so take these trades any chance you get.” The writer is referring to trades when… (1) there is a clear daily up trend… and (2) the price has pulled back to the up sloping diagonal trend line.
“Trying to catch reversals by nature means going against the trend, but there are times when this is a high probability trade. A dedicated trader who has patience can be very successful at catching tops and bottoms.” This is exactly what I am currently doing with my outstanding active trades.
Reminder that when the price action approaches round numbers, it is likely to reverse due to collective human psychology. Collectively, traders will psychologically will the price to get to the round number, then once there, will inevitably lose interest causing the price to reverse.
“Trading breakouts requires a patient and dedicated trader. Many breakouts will lead to false signals, and though overall they may have a low percentage of success, when they do work, they can be very rewarding.” This is where the Ichimoku comes into play. With the lagging span, and using the 4 hour, I would say a trader would be able to catch all breakouts with at least 80% accuracy (if not more). This is why I should be slow to share my trading method as it has been hard-earned.
“the trades with the highest probabilities are the ones that are made in the direction of the major trend, and so when those trades come along, one should be more aggressive.” Okay, I see! This suggests that if the DXY and the US10Y change direction, then I should consider risking more capital in relation to any relevant trade that I put on.
It enable me to appreciate that if I am to consistently take small profits then it is mandatory that I must also take even smaller losses.
This text confirms (to me) that when it comes to placing stop-losses and taking profits, I appear to already follow trading best practice and his professional advice (scale out).
In due course, I will definitely practice entering back into a trade on a pullback if I exited the trade to early. The writer reminds that doing so would be equivalent to entering to a fresh new trade so I would have to make sure the risk to reward ratio still makes sense.
It was great to learn that professional traders, like myself, may use stop losses (disaster stops) placed at 1:1 or further to avoid the market noise when trading the most volatile assets or markets.
“One thing that will make you a better trader is having two different stop levels. The first one alerts you that you are wrong, such as a trend-line, a moving average, or another technical level. At this point you begin timing your exit if the market doesn’t get better.” Intriguingly, this is what I have unknowingly been doing, in addition, combining multiple stop losses with scaling my entries.
Just the idea of making a trade without a good reason that I would be ashamed to explain to someone seems very strange to me. Therefore, this suggests (to me) that unknowingly I have always been working on how to discover the highest probability trades.
“Remember that the best traders tend to trade only one market or sector and are experts in it.” The writer wrote this in 2003, before the widespread availability of technical charts, and he still felt it was necessary to use fundamental analysis. If my current experience continues to remain valid, then it has really become irrelevant what markets a trader trades on the basis that they can carry out excellent technical analysis. That said, it will still make sense to focus and become expert on a handful of assets or markets continuously as oppose to always trading something new and different.
A crucial message not pushed (firsthand) by many experienced traders on Youtube is that a trader may learn to wait patiently with the weekly timeframe for high-probability trades in order to go to the next level.
Key point: “When the market is trending, however, and just retraced to the trend-line and there is a clear stop not too far away, I consider this a high probability opportunity and trade it with more size. You need only 2 or 3 good days a month to get rewarded in this business. There is no need to try and make a killing every trade or every day.”
I definitely feel that I have the two most crucial things that I will need to develop a high-probability mentality, which is (1) having the discipline to make and wait for the right trades (hence why I currently trade the weekly timeframe), and (2) applying the money management skills that will enable me to make more profit with my winning trades, and experience smaller losses with my losers.
This book has allowed me to acknowledge that my trading plan involves me trading using inter-market analysis. Generally, I trade in accordance to the weekly timeframe direction of the DXY and the US10Y in order to make my trades high-probability. Essentially, this makes my trading style difficult to perform for the average trader, which is very desirable (reduces competition). I also use the Ichimoku indicator along side the stochastic RSI, Relative Strength Indicator, and trend-lines
My current behaviour of closing my losing trades quickly without hesitation is something that the writer says when he does the same thing he is very proud of his behaviour, suggesting that it is a crucial characteristic.
My Discretionary Trading Plan or System (1) Analysis the DXY and US10Y on the weekly timeframe to determine the trend or price action direction… (2) Analysis the weekly and daily timeframe of stock market indices, tech stock, Bitcoin and any other asset interested in trading to determine all the major support and resistance areas… (3) Short or Long the financial market or assets in accordance with the direction of the DXY or US10Y using the weekly timeframe… (4) Scale into position with entries, and scale out with take profits… (5) Use ETFs such as the TLT in relation to the US10Y. In essence, unknowingly, I have been continuously reviewing and seeking to strengthen my trading plan everyday like a trading professional.
Intriguingly, the writer claimed that “the oldest, simplest, and most effective systems are breakout systems.” This may suggest that it would be worthwhile looking into them specifically as one of my next course of actions to improve my trading. But, today, my current understanding is to use the lagging span from Ichimoku to confirm the breakout of price action from a slopping trend line.
In light of the advancements in AI, it is good to know that “… it is impossible to program some proven technical analysis patterns and methodologies into a system. And that a good trader can see patterns in the market that a system cannot capture.”
If my understanding is correct, we cannot adequately backtest discretionary trading systems?
When testing out a new trading method or strategy, I should carry out about 30 trades minimum (the more the better) in order to be able to draw any meaningful conclusion.
“If a system doesn’t perform well after you take one or two of the largest trades away, it is not very reliable.” This is something for me to be very mindful of when I assess my trading strategy after 30 trades or so.
It’s so true: it is actually the defence that wins games. If the other side cannot score then we cannot lose. From a trading perspective, if we don’t lose large amounts of capital (defence), then we have a firm foundation on which to win. Similarly, playing tennis, it’s about just hitting the ball over the net to allow our opponent to make a mistake as opposed to trying to always hit a winning shot.
“Whatever your total available capital is that should not be how much you trade with. Instead, you should take your available trading capital and divide it in half or whatever percent you feel comfortable with.” It will be very very important for me to apply this approach as my trading account grows into a substantial amount.
It is extremely important that I do not increase my trading size because I have been winning or losing, as this is not the proper time to do so. Smart money management and emotionless trading is the key so increase with high-probability trades only, and so forth.
The importance of scaling into trades like ancient pyramids. In others words, when going long make sure that most of the capital is allocated at the first entry point then reduce it accordingly as you make further entries (3, 2, 1). And with shorts, it will be doing the reverse: make sure the higher the short entry the more capital you allocate (3, 2, 1).
Trading really does lend itself to the serious minded business person, who is committed to life-long learning. In essence, anyone who is has an extra-ordinary level of discipline can become a good trader. Whether that be athletes, musicians, good students, and professional gamblers, among others, people who work hard and spend hours they need to become good at what they do can apply their skills to trading, and become good traders.
Strategically, it may still make perfect sense to focus on one or two markets only, to ensure that I become an expert at monitoring and anticipating the price action of the relevant financial asset or indices. The markets that come to my mind that I would like to specialise in would be Bitcoin and Altcoins, US10Y and TLT, and DXY and tech stock. Basically, three different financial markets that have inter-market relationships.

Key Strategic Sentences and Paragraphs from ‘High Probability Trading’

Preface

“Trading is easy; anyone with a few bucks can do it (Loc 74).”

“Making money, however, is a whole different ball game. A simple fact of trading is that almost 90 percent of all commodity traders and those who day trade equities lose money (Loc 75).”

“As important as learning how to trade successfully is learning how to avoid losing. People who are not clear on this will have trouble turning the corner and becoming winning traders (Loc 82).”

“Much of that learning consists of being able to tell the difference between high and low probability situations. By doing this one can begin to filter out trades that have a low probability of working while being more aggressive on others (Loc 89).”

“I may tend to repeat main points throughout the book; this is not because my editor wanted a bigger book but because these things are important and repetition will make them stick in the reader’s mind (Loc 102).”

“The best traders always trade when the odds are in their favor, not just because the market is open. They trade for a reason: to make money, not to amuse themselves. For the most part high probability trades are made only in the direction of the major trend (Loc 114).”

“When one is correct in picking a top or bottom, the reward can be substantial, so cumulatively these trades can have a high probability of success (Loc 125).”

“In a nutshell, a trader who makes money is one who works as hard during non-market hours as he does when the market is open (Loc 132).”

“Treats trading like a business…

Has a low tolerance for risk…

Trades only when the market provides an opportunity…

Can control emotions…

Has a trading plan…

Has a risk management plan…

Is incredibly disciplined…

Is focused…

Has backtested his trading methodology (Loc 138 – 140).”

“I’m not too proud to say that I was a horrible trader, and I detail all my losing habits as well as those I’ve seen in others along the way (Loc 147).”

“I conclude each chapter with a short section called “Becoming a Better Trader,” followed by some tips on what to do and what not to do, and some questions traders can ask themselves to make sure they are doing the right thing (Loc 159).”

“Overtrading, for example, was my biggest albatross until I noticed that every other trader who overtraded lost as well; the more selective traders were the ones who continuously made money (Loc 170).”

“We went to trade out of a brokerage office, with several other experienced former floor traders. It was here that I learned to read charts and began to work on system writing (Loc 177).”

Chapter 1 – The Tuition of Trading

“Doctors, lawyers, and engineers need to go to school for years before they are expected to be professionals and earn a living. These people do not just decide to work in their field and start doing so from day 1; they work up to it (p. 2).”

“Unfortunately, Harvard doesn’t offer any degrees in trading. The only “schooling” traders get in learning their profession is hands-on, and the money they lose can be considered their tuition (p. 2).”

“The first few years of trading should be considered “the learning years.” This is not the time to try to make a killing; instead, one should concentrate on preserving capital and educating oneself (p. 3).”

“It doesn’t matter whether one is investing in stocks or day trading bonds; it takes a lot of hard work and experience to be able to trade well (p. 3).”

“Trading is an ongoing learning process, not something that can be learned overnight by reading a book or going to a seminar (p. 4).”

“These are just a few things that paper trading can’t simulate, and though it’s important to risk real money, it is wise to start on paper until one gets a feel for the markets. I also recommend voraciously reading everything one can get one’s hands on. There is always room for improvement, and after 15 years in the business I’m constantly trying to learn more about trading (p. 5).”

“From everything I’ve ever heard, read, and seen, a trader needs about 3 to 5 years to get through the learning period (p. 5).”

“In my opinion, to be realistic and have a fighting chance to succeed one should have a minimum of $25,000 to $50,000, a 3-year horizon, and a very understanding spouse (p. 6).”

“… good period, I’d say I lost over $75,000 over a 7-year stretch before I was able to trade consistently well. I was a slow learner (p. 7).”

“You need to be able to enjoy life; if you are trading with money that you planned to use for a nice vacation or new car, you are not properly capitalized. You would not believe the difference it makes when trading is more relaxed because there are no monetary problems to worry about (p. 7).”

“… losing is part of trading, and losing properly is what makes good traders better (p. 10).”

““There’s no need to go for winners every time; you end up hitting more shots out or wide when you do that. Just hit the ball to the other guy’s weak spot and you won’t get hurt” (p. 11).”

“THINK SMALL One must be careful in the first year or two to understand that this is not the time to make a killing but the time to learn (p. 12).”

“Keep it as simple as possible, trade only a few markets instead of trying to jump into every market or stock. Get to know how certain markets act before you start to spread yourself too thin (p. 12).”

“When one gets into trading, it should be not for a year but for a lifetime. If you plan to still be trading in a decade, what does it matter if your first year’s profit is small? (p. 12).”

“… but to be a winning trader one must be determined to win and be in it for the long haul (p. 13).”

“It means reading books, going to seminars, and being the best one can be. It’s crucial to believe you are the best trader in the world. If you have doubts, you will never be able to succeed, as you will live up to your own low expectations (p. 13).”

“… overtrade, as you’ll have less time to trade when you have to write down everything you do. It will also help build the one thing every successful trader needs: Discipline (p. 14).”

“Rate your trades on any scale you want and see how you do. I used to plan all my trading scenarios for about 10 markets every night. I had buy and sell scenarios on each commodity, and I would rate them from one to five stars, with five stars being the best (p. 16).”

“If you can distinguish between different opportunities, you are on the way to making only high probability trades and ignoring those which are marginal” (p. 16).”

“If there was ever a profession that required continuous on-the-job training, trading is it. Keeping a journal is like taking class notes; it should be reviewed on a regular basis if it is to help. Just keeping one isn’t good enough; one should go over it carefully to see where one’s strengths and weaknesses lie. When you start reviewing your trading performance, you can begin to get on the right track (p. 18).”

“Besides looking at my mistakes, I compliment myself when I trade smartly (p. 18).”

“Many professional traders go through extensive training before they are expected to succeed. When I started trading equities, they told me that they expected all new traders to lose for the first 2 years (p. 19).”

“The reason they take only these elite candidates is that these people are proven learners. The firms figure these people will be easier to teach than someone who was only able to get into a mediocre graduate school with modest grades (p. 19).”

“I’ve suffered so much from being undercapitalized that I think I could have turned my trading career around much sooner had I been better capitalized and used the early years to gain experience instead of trying to make a living straight out of the gate (p. 20).”

BECOMING A BETTER TRADER

“Becoming a better trader takes time, but one can do it if one is committed, is willing to put in the time, and has enough capital to succeed (p. 21).”

“People need to have enough capital to survive as they learn the ins and outs of trading. A $5000 account will probably not be enough to give a trader a chance to succeed (p. 21).”

“Overall I’ll stress that you should take it slow and preserve your capital until you’ve been trading for over 2 years; even after 5 years traders are still in for a surprise or two. By taking it slow you give yourself the chance to be around for the long haul. After you’ve paid your tuition and dues, you are ready to graduate and make a living from trading (p. 22).”

Chapter 2 – Setting Realistic Goals

“Your goal as a new trader should be to trade lightly and learn. If you were to make $5000 for the year, you’d be doing fine and achieving results better than those of 90 percent of all traders (p. 25).”

“He learned the hard way about setting realistic goals. Six months later, after losing a little more, he gave up and went back to real estate full-time. He could have been a good trader, but he never gave himself the proper time to learn to trade (p. 25).”

“They do this by being more selective in their trades, looking to take out steady profits without trying to make a killing on any trades. Instead of having a dollar goal they concentrate on making good trades, and the money comes as a result (p. 27).”

“Five thousand dollars is just too small to withstand a losing streak at the start. If you have a small account, that’s okay; just set your goals to match your capital and trade according to your means (p. 29).”

“On average it won’t go much beyond its $4 average range. The percentage play is looking to get out when the market is within 80 percent of the average daily range. Take a look at Chart 2—1. For months the average range of AMAT has been about $4; there have been relatively very few days when it has moved much more than this (p. 31).”

“If you don’t have software that gives you the ATR of a market, you need to figure it out by hand or with Excel (p. 32).”

“You have to keep reevaluating the ranges of markets over time so that you’re not stuck thinking they are something different from what they are. I like to look at the average of the last 5 and 10 days when determining the average true range of a market (p. 32).”

“When you swing for the fences, you tend to strike out a lot more; it’s better to hit three or four singles in a day than to go for homers. Going for the smaller waves is safer and usually more profitable (p. 33).”

“The best way to get a feel for the lengths of the average wave is a combination of knowing the market, having a working knowledge of Elliott wave analysis, and using trend-lines, channels, and oscillators to determine (p. 34).”

“The smart money knows what the range of the stock is and stops shorting the stock when it nears its ATR (p. 34).”

“… you have to have goals that will be everyday steps in helping you improve (p. 36).”

“This is really two goals, not one. The first one is to find your weaknesses, and the second is to fix them. Throughout this book when you find something that pertains to one of your weaknesses, make a note of it and concentrate on changing it (p. 36).”

“Try to keep losers to under 2 percent of your equity, the lower the better (p. 37).”

“Between 1999 and April 2000 people made a lot of money buying any tech stock they could get their hands on. Those people weren’t good traders; they were lucky ones. They could do no wrong in that period and unfortunately got a little too cocky and paid dearly in late 2000 and 2001. They never developed any money management skills or realistic ideas of what a stock should do (p. 37).”

“Those folks learned the hard way that trading is not as easy as it looks, and that one should have realistic goals even when the market is not acting realistically (p. 38).”

“As I mentioned in Chap. 1, trading is not easy or something most people can master right away (p. 38).”

“You shouldn’t expect to be a success overnight, and you need to be realistic about how long that will take. I’d say that it takes 2 to 5 years before you have paid all of your tuition and dues as a trader. During the first couple of years the overall goal of a trader should not be to make x amount of dollars; it should be to still have enough capital to be trading with after that time is over with; making money will come on its own (p. 38).”

“About 90 percent of traders will fail, and the more honest you are about those numbers, the easier it is to avoid falling into that category (p. 39).”

“As a businessperson, a trader should have the goal of making the decisions that will lead him to make the most money possible with the least risk (p. 40).”

“A business plan is not easy and can be time-consuming, so I understand why few traders do it; however, if people took the time to do it, it would help them (p. 40).”

“I gave back many good trades because I was not realistic about taking profits (p. 42).”

“Though it is always important to be realistic, to be a better trader you have to believe that you are the best trader on earth and keep envisioning that every day. If you don’t, you will never become the best (p. 43).”

“4. Know the average true range (p. 44).”

“13. Treat trading like a business (p. 44).”

Chapter 3 – Levelling the Playing Field

“Imagine entering your car in the Daytona 500. Sure you may be a good driver and have a brand-spanking-new, top-of-the-line foreign sports car, but in your wildest dreams would you ever believe that you had a chance of winning against professional race car drivers with state-of-the-art racing machines? No matter how good you may be, you will never be able to compete with them until you have the same experience, know-how, and equipment. Not only would your chances of winning be slim, you’d be lucky if you didn’t wipe out. Trading should be thought of in the same way (p. 46).”

“Despite having everything readily available in real time, many novice traders still hope to compete successfully by using free but delayed quotes, charts, and news (p. 48).”

“Trading online has revolutionized the brokerage business and has become a tremendous advantage for the average retail trader. Though it has its benefits, I do not recommend it for traders who are starting out (p. 49).”

“Though online trading may be the cheapest way to go, one should really know how to trade before venturing to trade without supervision. However, once you are comfortable trading, then by all means take advantage of the low cost of trading online (p. 56).”

Chapter 4 – Trading the News

“I had mostly long positions, but to balance such positions I like to find some stocks that are reacting weakly in a strong market (p. 63).”

Chapter 5 – Increasing Your Chances with Multiple Time Frames

“However, having proficiency in technical analysis can be a great asset to a trader and could supply the edge one needs (p. 78).”

“Whatever the news is, knowing how to read a chart will give a trader a clearer picture of what the market is doing (p. 78).”

“Even though it is not an exact science, I believe the traders with the best working knowledge of technical analysis have an advantage over other traders (p. 79).”

“I asked him which time frame he used to trade with, and he told me he used all of them. His trading strategy was to make a trade only when he got confirmation in all the different time frames (p. 80).”

“First of all, he would trade primarily in the direction of the overall trend, and he used the daily and weekly charts to get that trend (p. 80).”

“Watching his setup and the way he traded opened up my eyes to a higher level of trading, that of using multiple time frames (p. 81).”

“By looking at the higher time frames one can see what the direction of the major trend is and where the support and resistance levels are. By knowing the major trend, one should have an idea of what direction to be taking trades in (p. 83).”

“If a trend on the daily and weekly chart is up, long trades are the higher probability trades (p. 83).”

“In either case you will lose much less if you are wrong while increasing the chances of the trade working. This multiple time frame process applies to all traders, from scalpers to those who hold for weeks. By getting a full all-around picture one can find, time, and monitor trades better (p. 83).”

“Something that a trader can do to increase the probability of a trade working is to have a system that generates signals and then use it on more than one time frame (p. 90).”

“Signals from a longer-term chart are much more significant than are those on shorter-term charts, as they provide momentum for the shorter time frames (p. 92).”

“The shorter-term signals that are in the direction of the longer-term signals tend to be stronger than are the countersignals. When you trade with the momentum of the market, as opposed to fighting it, you become a better trader (p. 92).”

“When you get opposite signals, it is a no-trade situation as in effect they cancel each other out (p. 92).”

“If you trade multiple contracts, one thing you can do is put on a portion of your normal position when you get a signal in a shorter time frame. If it is working and you get a signal in the next time frame, add to it; if you later get another signal in an even higher time frame, add to it again. By doing this you can build into a position and get onboard early to catch a larger part of the move (p. 92).”

“I find it best to use at least four time frames for day trading (p. 94).”

“14. Trade only when all time frames are in sync (p. 95).”

“Traders need to remember the old adage “The trend is your friend” and try to trade with it. Trades that have the highest probability of working are usually in the direction of the trend (p. 96).”

“To determine what the long-term trend is, use daily, weekly, and monthly charts (p. 97).”

“A trend-line that is too steep is not very reliable and is easy to break; a trend-line with a slope of 20 degrees will hold much better than will one with a slope of 60 degrees. The trend-line in Chart 6—2 is moderately sloped and is one I would feel comfortable trading from (p. 98).”

“… is in a clear trend, it is not worth going against it; instead, one should wait for a retracement to get in on the right side (p. 99).”

“This is a great trade because if it breaks the trend-line, you will know immediately you are wrong, and so the risk is small. If the trend-line holds, you can catch a good move as long as you can hold a winning trade (p. 100).”

“Whether it’s a real or a false break, one should be prepared and have a scenario for either case before it happens (p. 101).”

“When you are wrong and are going against the trend, it can hurt because the trend can return with force. Someone who is going to countertrade has to be as nimble as a rabbit and be willing to take a small loss often. I find it better to sit out and wait for the countermove to finish than to try to make a few ticks on it (p. 104).”

“One year later many of these stocks were trading below $5 per share with little hope of recovering. The big lesson I learned here was that a market is never too cheap or too dear. Trends will go on as long as they want to, not to a price one thinks is too cheap. A trader needs to pay attention to price action, not opinions (p. 104).”

“Many different indicators tell you the same thing in a different way, and since I like to keep things simple, I stick to just a few (p. 105).”

“Having more than one average not only alerts you to entry and exit points when they cross but can confirm the validity of a trend, as a market that rides above more than one moving average is stronger (p. 108).”

“Many people just use two averages, but having a third will cut down on trades and force one to trade in the direction of the longer trend (p. 109).”

“Trade only in the direction of the trend and the moving averages. When there is a crossover between two averages, trade only in the direction of the crossover (p. 110).”

“The ADX does not tell you the direction of the trend; it only tells you if there is a trend and measures how strong it is. The ADX looks the same for either an uptrend or a downtrend. The higher it is, the stronger the trend is. It works by comparing how much higher or lower the ranges of subsequent days are. If the ranges get larger, a strong trend is in play; if the ranges are smaller, the trend is weak (p. 110).”

“On its own, the ADX lags price action and is not a great indicator, and so one should not use it to trigger trades. Instead, it should be used as a way to get confirmation of whether the market is trending or choppy and how strong it is (p. 111).”

“Both are signs that a strong trend was in play. At Point E the ADX is strong but is beginning to peak; this may imply that the downtrend is losing strength (p. 113).”

“Measuring Retracements So how far should the market retrace? The normal levels that traders look for are a third, a half, and two-thirds of the previous move. These numbers are very close to the ever so popular Fibonacci levels of 38.2 percent, 50 percent, and 61.8 percent (p. 115).”

“The levels at 61.8 percent or two-thirds are considered the breaking point of a trend. If these levels break, the major trend is over and then a new one is beginning. In Chart 6—10 you can see that after the first run-down from Point A to Point B, the market retraced up to the 38.2 percent level (Point X), where it stalled for a little while. Once it broke through there, it stopped dead in its tracks at the 61.8 percent level (Point C). If you study charts, you will see these retracement levels hold time after time, so get into the habit of knowing where they are (p. 116).”

“Finding a trend is just part of the work. Once you have one, figuring out how far it can go is even harder. Fibonacci ratios are also useful in predicting how far a market will extend its current trend. This is done by taking the difference between the high and the low of the major move; multiplying it by 1.382 percent, 1.5 percent, and 1.618 percent; and adding it to the low in an up move or subtracting it from the high in a down move (p. 116).”

“You can see in Chart 6—11 how the volume picked up just as the market spiked at Point B. When this happens, it means everyone is rushing to get in and soon there may be no one left to buy, and so the market could easily sell off if there are no more buyers (p. 118).”

“Never rush into a trade just because you know the trend; waiting for some sort of retracement will increase your chances (p. 119).”

“Look for retracements of 38.2 percent, 50 percent, and 61.8 percent or wait for the market to go back to its trend-line or moving average before getting in (p. 119).”

“Forgetting that there is no such thing as too high or too low (p. 120).”

“Look for the end of a trend when the last wave doesn’t reach the channel line or the previous move (p. 121).”

“17. Wait for confirmation of a trend-line breaking before reversing position (p. 121).”

“A funny thing about trading is that what one person sees as a strongly trending market another person sees as an overbought market that is ready to reverse (p. 122).”

“… by knowing how to use momentum oscillators such as stochastics and the relative strength index (RSI) properly, one can gain an edge (p. 122).”

“Oscillators basically reflect the speed at which prices change. An oscillator works by comparing closing prices for any given time frame, using previous closing prices to determine whether the market is gaining or losing momentum (p. 124).”

“The market may still be going higher, but when the strength of the moves has slowed or remains constant, an oscillator begins to stabilize and fall (p. 124).”

“Stochastics…. At first I didn’t really know how to use it correctly; I just liked the way it always seemed to turn at market tops and bottoms (p. 126).”

“But as I learned to use it, it grew to become an important part of my trading. When I ignore or misuse it, I find I get hurt by either chasing the market or getting out too quickly or at the worst possible time (p. 126).”

“This is what makes oscillators tricky: Sometimes the overbought area can mean the market will turn, and other times it means the market is strong (p. 130).”

“5. Look for a Failed Move in the Stochastics (p. 130).”

“The failed move doesn’t have to happen after a peak in overbought territory or a bottom in oversold territory. It can happen any time both lines change direction, and then the faster %K line turns back but stalls at the %D line without crossing it. When this happens, it provides strong confirmation that the initial move was good (p. 131).”.

“2. Buy When the RSI Stalls at the 50 Line (p. 133).”

“One needs to be aware that the market won’t always reach oversold or overbought areas. If it stops at around the halfway point, that may be a good place to enter (p. 133).”

“Instead of the RSI being used to show overbought-oversold areas, it can be used to follow the trend. If the RSI is greater than 50, then the trend’s momentum is up and one can consider only buying. In general when the market crosses above the 50 line, a buying scenario is in place; when it goes below that line, you can think about selling (p. 133).”

“Look for divergence between price action and the RSI. This is done the same way one would with the stochastics (p. 134).”

“When the oscillator is near the high of its range, I would never consider it a good time to buy because the market has already had a move up and the odds of a pullback are stronger (p. 137).”

“What most traders don’t realize, however, is that oscillators weren’t created to catch market turns but to be a way to see conformation in a trending market and a tool to assist traders (p. 139).”

“Markets trend only about 20 percent of the time, but when they do trend, they can be strong and using oscillators can be costly (p. 140).”

“4. There are times when the market is sloping upward and an oscillator is sloping downward. This divergence should be taken as a warning that something is wrong. More often than not this indicates that price is about to change direction (p. 142).”

“One of the best ways to use stochastics is in cahoots with trend-following indicators (p. 143).”

“When the market is in an uptrend, use the oscillators to wait for a pullback in the market; when the retracement is oversold, look to get in (p. 146).”

“What is helpful is knowing where the ADX is. If it is above 30, trend-following indicators will work best. When the ADX is below 20, you can consider the market choppy and range-bound, and oscillators will work better at picking overbought and oversold conditions (p. 146).”

“The fact that the indicator is overbought doesn’t mean that the market will sell off. It can keep going for quite a while, with you patiently waiting for it to reverse. Remember, the market does what it wants to do and not what it should do, so don’t be stubborn waiting for something to happen or anticipating a move that never comes (p. 146).”

“2. Exit trades as the oscillator is peaking (p. 147).”

“Use longer time frames to find out how much room is left in a major trend (p. 147).”

Chapter 8 – Breakouts and Reversals

“No big move starts without some sort of breakout or reversal (p. 149).”

“An added advantage to trading with a breakout is that if it leads to a big move, one avoids being on the wrong side of the move (p. 149).”

“The longer it stays in a channel or range, the bigger the move tends to be when it finally breaks out of the range, as it will have gathered more attention (p. 152).”

“A rule of thumb for when a market breaks out of a congestion area is that the move will be about the same length as the congestion area is wide (p. 152).”

“As in the previous example, the market once again stalled after it had traveled the distance of the width of the congestion (p. 152).”

“… there will be an abnormally large number of stops just outside that area (p. 154).”

“Instead of jumping the gun, a trader should wait to see a market make its move before doing anything (p. 155).”

“To have the patience to wait 20 minutes, an hour, or even 3 days until the market provides a better entry opportunity is too difficult for many traders (p. 156).”

“It’s not always easy for a trader to walk away from a tempting trade, but this is the difference between a high probability trader and a low probability trader (p. 156).”

“When you wait for the market to pull in, it is easy to get filled on limit orders and you can buy on the bid, getting a better price (p. 156).”

“… you also can see that the stochastics were above 50 and rising. These two things should tell you that when the market broke out of its little range, the odds were stronger that it would break to the upside (p. 157).”

“Here the stochastic is in overbought territory after having had a decent run, and one is better off waiting until the market retraces, hits support, or becomes oversold, as it did at Point 10, before getting in (p. 159).”

“The longer the time frame one is looking at, the more significant a breakout will be, but it looks and works the same on every level. Also, when a market approaches a trend-line, the steeper it is, the more likely it is that it will get broken (p. 159).”

“When shorts turn into longs, the volume doubles and it helps the market push through a trend-line Many traders ignore volume, but by paying attention to it you can scope out better trading opportunities (p. 161).”

“The rewards in these cases can be explosive, as was the case when the market broke Trend-line B, and the risks are minimal, so take these trades any chance you get (p. 162).”

BREAK

“Trying to catch reversals by nature means going against the trend, but there are times when this is a high probability trade. A dedicated trader who has patience can be very successful at catching tops and bottoms (p. 163).”

“In Chart 8—8 I’ve included a few reversal day patterns. You will notice that when the signal was combined with an overbought or oversold reading in the stochastics, the trade worked quite well (p. 164).”

“When I found one, I would place a stop to get me in, just at the other side of unchanged, so that if it went through it, I’d be in the market without even thinking about it. If the market finished the day moving strongly in my direction, I would hold on to see if it followed through the next day (p. 164).”

“When you see a market that reaches its previous level and can’t go further, there is a good chance it will be reversing direction soon. The way to trade these patterns is to identify the double top or bottom and then look to see if it breaks the trend it had been in (p. 166).”

“When a stock, commodity, or index hits or nears a nice round number such as 10,000 on the Dow, 2000 on NASDAQ, $20 in crude, or a significant technical level such as a previous high and can’t break through it, look for a reversal. As the market approaches these numbers, people get in just to push it there, but as soon as it gets there, interest dies down because the chase is over. This is a psychological barrier that is self-imposed (p. 169).”

“When a market starts dropping and approaches a round number, buyers wait to see what it does. There will be an abundance of limit orders at the number that will start getting hit, causing a slight bounce. People on the sidelines then may rush in, causing the market to bounce even higher; then the shorts start to cover and the down move is temporarily over, causing a reversal (p. 169).”

“Aside from the traditional Fibonacci retracement levels described in Chap. 6, there are a few other ways to measure a potential move. One way, as I mentioned earlier, is to take the width of the sideways congestion to measure the move after a breakout (p. 169).”

“If the market does break and travels the expected distance of the previous range, look for a place to get out instead of getting greedy, hoping for more (p. 169).”

“Trading breakouts requires a patient and dedicated trader. Many breakouts will lead to false signals, and though overall they may have a low percentage of success, when they do work, they can be very rewarding (p. 172).”

“When a breakout is unexpected, it tends to act the best. When the support has been very strong and everyone is expecting it to bounce, the surprise of seeing it breaking through makes people liquidate and switch positions, adding fuel to the fire (p 172).”

“A trader must wait for this first half hour of trading to determine this range and then take trades on the side of whichever way the market breaks out of that range (p. 173).”

“A good trader is always ready to act when the market approaches a level from which it could break. It may or may not break, but by being alert when it is near a potential break level, one can react quickly if it does (p. 174).”

“To become a better trader one needs to incorporate a few tools to learn when a breakout has a good chance of working. These tools include using trend-lines, breakout patterns, oscillators, reversal patterns, and volume (p. 174).”

“the trades with the highest probabilities are the ones that are made in the direction of the major trend, and so when those trades come along, one should be more aggressive (p. 175).”

“Finally and most important, I believe that one should never chase a trade (p. 175).”

“If you chase, the risk can become too much to handle, so wait for the pullback. It could take a long time to get it, but one gets rewarded for patience in trading (p. 175).”

“The steeper a trend-line is, the more likely it is that it will get broken (p. 176).”

“Scale into positions until the market finds some support (p. 176).”

Chapter 9 – Exits and Stops

“Many traders expend too much effort finding entry signals and patterns and not nearly as much time as they should exiting a position (p. 178).”

“Without protective exit strategies it is impossible to be a successful trader (p. 178).”

“A lack of really good profitable trades can hurt a trader as much as all his losing trades will. It is expected that more than half a trader’s trades will be losers–that’s part of trading–so in order to compensate, the winners have to be bigger than the losers (p. 179).”

“There are traders who do quite well by repeatedly taking small profits, but what is key for them is that they take even smaller losses (p. 179).”

“If you have small losers, your winners can be modest; if you have medium-size losers, you must have large winners; if you have large losers, you need jumbo winners; and if you have jumbo losers, you will need to learn the phrase “Would you like to jumbo size that?” (p. 180).”

“I learned two lessons that day. One, never let other people’s opinion affect your trading (p. 181).”

“As part of a good exit strategy one should learn how to scale out of a trade in stages. Trades don’t need to be exited all at once; instead, one may do better by scaling out of them. But few people will think this out beforehand; they just get in and out of a trade all at once, with little thought (p. 182).”

“By learning to scale out of winners you will allow yourself to get out with a little profit and give yourself a chance to catch a big move (p. 182).”

“If you get into a trade because of a support level or some indicator and it fails to do what it should do, don’t wait to get stopped out; as soon as you know you are wrong, get out (p. 183).”

“Many people think that by taking a loss they are losing, and this is just not the case. The more quickly they understand that losses are normal and are expected half the time, the sooner they will be able to exit bad trades immediately (p. 184).”

Don’t think you are safe because the market hasn’t stopped out the trade yet. You never need to wait to get stopped out. If the trade feels wrong, just exit it even if it’s barely against you or slightly in your favor. This can save you a lot of money in the long run (p. 186).”

“Having stops that are too far is senseless. A trader may end up losing $500 when he should have lost only $300 (p. 190).”

“The only technically correct place to put a stop may cost you more than you want to lose, and in that case a trade should not be taken as the reward is not worth the risk (p. 190).”

“In these cases it is better to wait for a safer opportunity to come along than to risk too much (p. 190).”

“Stops should not be based on how much you can afford to lose; instead, they should be placed where the market tells you a good spot is (p. 191).”

“If this is not a place where you would think about initiating a new trade because it would be too risky, it’s okay to get out (p. 201).”

“The disadvantage is that there will be times when you exit a trade prematurely by getting out while it is still working. If this is the case, you shouldn’t be afraid to get back in the trade at the next pullback even if you get in at a worse spot. At this point, it’s a whole new trade and you need to let go of the past. So what if you gave up some profits? You made the smart choice by cutting risk, and now you are in a fresh position with less risk (p. 201).”

“Disaster Stops If you don’t have real stops entered in the market because you think they may get hit by the random noise of the market, you can use what I call disaster stops. These are stops that are rather far away and will get hit only if something major happens, such as an unexpected rate cut. These faraway stops very rarely get hit in normal circumstances, but they can give you a little peace of mind and will keep a trader who doesn’t like to enter stops from getting killed if something happens (p. 203).”

“Never place stops near technical levels such as trend-lines, moving averages, previous highs and lows, congestion areas, and round numbers such as 10,000 in the Dow (p. 203).”

“Remember, don’t place stops at very obvious levels; think twice about where you are placing them and use a little bit of a buffer to give you some breathing room (p. 203).”

“One thing that will make you a better trader is having two different stop levels. The first one alerts you that you are wrong, such as a trend-line, a moving average, or another technical level. At this point you begin timing your exit if the market doesn’t get better (p. 208).”

“If there is no improvement and your second area (outside a buffer zone) gets hit, you get out of the market (p. 208).”

“Overall, I’d have to stress that when you make a trade, you have to give the exit the same attention you gave the entry (p. 208).”

“5. Get out when the reasons for getting in have changed (p. 209).”

Chapter 10 – Making the High Probability Trades

“Therefore, she waited patiently for the sparrow to make its move, giving her a higher probability of catching it. This wait paid off for her as her timing was perfect. If a trader would have this kind of patience to wait for the market to present itself with low-risk, higher probability opportunities, he would also fare much better (p. 212).”

“One of the things that will make a trader better than the rest is being able to distinguish between high probability and low probability trades. Traders will improve their chances of success as soon as they can do this (p. 212).”

“Part of that trading plan is to consistently make only trades that have a high probability of working out and a low risk/reward ratio (p. 212).”

“You also must have a good reason for making a trade, one that you would not be ashamed to explain to someone. Some people make irrational trades with little thought behind them; whether they work or not, these trades are not high probability ones (p. 212).”

“the goal is to cut out the haphazard trades (p. 213).”

“The other important aspect of making high probability trades is using all your knowledge and tools and having the patience to wait for the market to present good trading opportunities (p. 213).”

“A Few of the Ingredients in Making High Probability Trades…

Using different time frames to confirm and time trades…

Trading in the direction of the major trend…

Waiting for pullbacks…

Having a predetermined exit strategy…

Planning trades before the market opens…

Using a combination of trend-following and oscillating indicators…

Having a reason for every trade…

Knowing the risks involved…

Staying focused…

Having discipline (p. 213).”

“The reading in the RSI above the 50 line but below the overbought area shows that the market is strong and still has room to go up (p. 214).”

“Since there are many reasons for making stupid trades and every trade one makes should have a good reason behind it, you may want to take a second before pulling the trigger. Ask yourself, “Why am I making this trade?” If you truly have a good reason after asking yourself that, then make it, but if the reason is not worthy of a trade, lay off it (p. 217).”

“Some traders look at too many markets and/or have too many positions on, and so they spread themselves too thin. Instead of looking at every market, traders should take the time to become experts on the ones they trade best. Remember that the best traders tend to trade only one market or sector and are experts in it (p. 218).”

“A trader who is scared of missing a move will keep finding himself always in the market, and many of his trades will be mediocre at best. Once a trader learns to wait for the high probability trades, his chances will improve dramatically (p. 220).

“When the market is trending, however, and just retraced to the trend-line and there is a clear stop not too far away, I consider this a high probability opportunity and trade it with more size. I’m not afraid to risk more here because the payoff can be worth it. Most good traders trade with light volume a good percentage of the time. They prefer to wait until the right opportunity presents itself to load up and make money. You need only 2 or 3 good days a month to get rewarded in this business. There is no need to try and make a killing every trade or every day (p. 222).”

“By concentrating on a few markets and taking mental notes you will begin to see patterns in the market that you should be able to capitalize on (p. 222).”

“Playing for these bounces when everything is pointing down in the long run is a waste of money. The only thing it does for sure is add commission costs to my P&L statement (p. 223).”

“Two of the most crucial things you need to develop a high probability mentality are having the discipline to make and wait for the right trades and having the money management skills to act accordingly when the better trading opportunities come along (p. 226).”

“3. Trading the opening of the market (p. 226).”

“7. Always risking the same amount (p. 226).”

“Trade more heavily when the odds are in your favor (p. 227).”

Chapter 11 – The Trading Plan and Game Plan

“A trading plan is a guideline that a trader uses to concentrate on consistently making good trading decisions. It consists of two parts: First, it’s a trading system or trading methodology that generates buy and sell signals; second, it contains money management parameters (p. 230).”

“Within those categories there are entering a trade, exiting a trade, stop placement, position sizing, and general risk levels. It also includes what markets will be traded and takes into account a trader’s emotional makeup and trading style (p. 230).”

“A trading plan is something that needs to be custom-built, as each trader has a different trading and risk style (p. 230).”

“A trading plan won’t change much from day to day, as it consists of a trader’s systems and money management plans. What will change, however, is a trader’s game plan, which he should make every day so that he can be prepared to take advantage of the market. This may include moving stops, knowing what to do after an unemployment number is released, and waiting for a market to reach a trend-line before getting in (p. 231).”

“The trading plan will include trading strategies that you should have tested to ensure that they are high probability ones with a positive expectancy (p. 232).”

“A trader need not have just one system; he can have different trading systems for different markets or conditions. Systems do not have to be mechanical, but they should lay the groundwork for when you should be long or short. Pick the trading style and indicators that best suit you and start tossing out ideas until you find something that works (p. 233).”

“I know that my typical good day trades last about 90 minutes to 2 hours, and for my longer-term trades I’ll hold for about 3 to 5 days. I may hold trades longer or shorter, but this is about the average (p. 235).”

“I like to review losing trades that I exited correctly with a small loss (p. 237).”

“To me these are the most important trades of all, and this is a behavior I want to reinforce. I am more proud of getting out of something with a small loss that could have turned out to be worse than I am about having a winning trade (p. 237).”

“The game plan includes the day-to-day decisions one makes when trading and is what a trader uses to execute the trading plan (p. 238).”

“The game plan will be to identify which markets meet the criteria each day and then how you would time entry into the trades (p. 238).”

“Don’t just think about it; sit down and write it out on paper. Having the discipline to write and follow a trading plan will without a doubt help you (p. 240).”

“You should not ignore the plan itself: Keep reviewing it every now and then for weaknesses or ways to improve it. A trading plan is a valuable asset to a trader, so make sure you have one (p. 240).”

Chapter 12 – System Trading

“A system doesn’t have to be elaborate, etched in stone, or purely computerized; it can be discretionary as well as purely mechanical, but it must give you a guideline to trade with (p. 243).”

“Many times I don’t use a formal system to trade with: I know what patterns to look for, and if I see them, I’ll make a trade. Since I look at different time frames all the time, it is hard to program one system that will read all the time frames. Instead, I use a series of systems and have to look visually for confirmation (p. 244).”

“Writing a system is easy and can be done in a few minutes; writing a good winning system, however, can take weeks or months to develop, adjust, rewrite, backtest, and repeat the whole process until it’s just right (p. 246).”

“Breakout Systems: The oldest, simplest, and most effective systems are breakout systems. The reason these systems work well is that they will get you into a trade at the start or during the continuation of a major trend. Every trend or major move starts with a breakout of the previous high or low, and if you want to get in on it, a breakout system is for you (p. 252).”

“A trader using these systems must be willing to be wrong quite often, as they will produce many false signals that can cause one to buy many highs and sell many lows (p. 252).”

“Many people like to use stop orders when getting into the market on a breakout. I don’t think it is always a good idea to do this because sometimes it’s best to wait for the pullback if the market is already overbought. What I do is have a system that alerts me when the market has met the breakout criteria and then I use a different system on a smaller time frame that waits for a pullback so that I can get a higher probability trading opportunity (p. 252).”

“Some breakout systems require patterns that are hard to program, such as channels, trend-lines, and double bottoms. With those systems, you will have to look visually at a chart to get signals, but if you come up with a set of rules for a trade, it is still a system even if you can’t program it (p. 254).”

“There are many ways to write signals based on oscillators, but trying to come up with a computerized signal for the best use of an oscillator–divergence between the market and the oscillator–is not easily done. Divergence is something that has to be seen visually on a chart, but there are many ways a trader can use oscillators in computerized systems (p. 256).”

“In contrast, when the market is strong, I use trending indicators and rely on oscillators to confirm the trend or to wait for a pullback. I avoid trying to pick (p. 258).”

“Discretionary traders may take some trades and not others; they may use the signals as an alert and then use discretion to time trades, especially if the market has had a run-up (p. 260).”

“However, as I mentioned before, it is impossible to program some proven patterns and methodologies into a system. A good trader can see patterns in the market that a system cannot capture (p. 261).”

“It’s hard to program things such as what wave in an Elliott wave pattern is the market in or if the market has retraced 38.2 percent yet. Head and shoulder, cup and handle, saucers, and flags are some patterns that are close to impossible to program in TradeStation. Some of these patterns make for great low-risk trades, and I am always on the alert for these kinds of trades (p. 261).”

“If a system is not properly backtested to have a positive expectancy, don’t use it; it can cause a lot of unnecessary losses (p. 262).”

“Even when you are trading with a solid computerized system, you can still use discretion on some trading ideas, as you won’t be able to program every good strategy. There will be times when things don’t feel right and you want to get out before a signal is given; as long as you are not cutting winners short on a repetitive basis, this is fine (p. 264).”

“Making and backtesting systems is not easy work, but those who want to get ahead will take the time to do it, as it is crucial for making consistent high probability trades. System writing can be quite time-consuming, but a successful trader will put the work into doing what it takes to come out ahead (p. 264).”

“Use systems that adapt to different markets (p. 265).”

“Work as hard on the exit as on the entry (p. 265).”

“You have to factor in a few other things when evaluating systems, including number of trades, profit per trade, consecutive losers, biggest loser, biggest winner, average trade, and distribution of returns. It is a combination of all these things that eventually will tell a trader if a system is good and how it compares to other systems (p. 268).”

“Not Testing on Enough Data or Market Environments (p. 270).”

“Another common mistake in testing a system is not having enough data. The minimum number of trades one should have to make a test statistically acceptable is 30, but the more the better (p. 270).”

“Curve-fitting a system makes it look great for a given period of time and for specific data (p. 271).”

“You probably could keep tweaking the system until it fit the data perfectly, but the problem with this is that the system is made for that data and probably will not work as well over any other data (p. 271).”

“As a trader you want to be concerned about how it will work on new data, not about how it worked in the past (p. 271).”

“This is why after you are happy with the system it is critical to test it on a fresh piece of data called the out sample, as I’ll describe soon (p. 271).”

“With TradeStation this is real easy to do as the software does all the optimizations for you. In seconds it spits out the best parameters for any indicator you want. Though this may seem like a great feature, it can mislead you into believing a system is better than it is (p. 272).”

“The best traders make money only 50 percent of the time, yet in real life people see 50 percent as failure (p. 277).”

“If people see a system with a 40 percent win/loss ratio, they instinctively think it is a loser because they are conditioned to think of it that way (p. 277).”

“It doesn’t matter if a system is right 30 percent, 40 percent, or 60 percent of the time. What is important is how big the average loser is compared to the average winner. If one has good risk management skills, even a system with a 30 percent win/loss ratio can be quite robust. Both of the systems here have percent profitability numbers in the low 40s, and this is what I typically shoot for (p. 277).”

“If a system doesn’t perform well after you take one or two of the largest trades away, it is not very reliable (p. 278).”

“The key to trading is to keep your losers smaller than your winners (p. 278).”

“I look for at least a 2:1 or 3:1 ratio between the largest winner and the largest loser but will settle for a 1.5:1 ratio before I’ll consider trading a system (p. 278).”

“The moral here is to know the system’s drawdown and make sure you can afford it (p. 279).”

“Risk-averse traders are more likely to look at the drawdown than at any other statistic. If they can’t stomach the drawdown they’ll abandon the system or make changes to limit the losses (p. 280).”

“When designing a system a trader needs to make sure it will cover his trading costs or else it will become a losing system (p. 281).”

“Take your time when backtesting. Don’t ignore it or get lazy about doing it, as it is a crucial part of making you a better trader (p. 283).”

“You can have the greatest system in the world, but unless you know how to manage money, you can easily end up a loser (p. 289).”

“Learning how to manage your capital properly is a lot more difficult than learning how to read charts, put on trades, and set stop losses. After 11 years this is still one of my biggest weaknesses (p. 290).”

“If you read Market Wizards or hear any top trader speak, you will notice that each trader may have a different approach to the market. One looks for trends, one looks for reversals, one scalps, one holds for years, one trades options, and another just spreads, but what they all have in common is that they employ a strict money management program and agree that it is the secret to their success (p. 290).”

“Basically, he is saying, Make more than you spend (lose) and you will do fine, but if you spend (lose) more than you make, you are ruined (p. 291).”

“For many traders, learning to take a loss properly can be hard, but eventually one learns that it is better to lose $300 than $1000 in a trade. One of the most critical things you can learn is that it’s not how much you make but how little you lose that counts (p. 291).”

“The consistent traders are not the ones who make the most but the ones who lose the least (p. 292).”

“I’ve been trying to cut back on my risk taking over the years, and it is something I have always had difficulty doing. I’ve been able to improve, but I’ll still take on more risk than others will at times. If you have a problem with taking on too much risk, you must acknowledge it and try to do something about it (p. 292).”

“I hit such a bad streak a few months ago where I lost money almost every day for 3 weeks that I called it quits for a week and went on vacation. When I came back, I was able to start again with a clear head (p. 293).”

“That can be done by having larger winners, smaller losses, or a higher winning percentage (p. 296).”

“Some markets are too volatile to trade and should be avoided because of the risks involved (p. 300).”

“Coaches always say that defense wins games. Sure, offense is important, but if the other team can’t score, you can’t lose (p. 300).”

“Whatever your total available capital is, that should not be how much you trade with. Instead, you should take your available trading capital and divide it in half or whatever percent you feel comfortable with. If it’s one-half, this is what you will use to trade with; let’s call it the at-risk capital. Keep the other half in an interest-bearing account and use it only as a safety net (p. 301).”

“The reason you never want to risk more than 5 percent is that this lets you be wrong 20 times in a row before getting wiped out, making it much harder for that to happen (p. 302).”

“I’m also wary about increasing risk during a good streak because it is inevitable that as soon as a losing streak comes, it will be bigger than the early wins in the winning streak. In essence, one or two bad trades that are made with more size can wipe out weeks or months of good trades with less size (p. 303).”

“Some people will trade only one market or stock at a time…. One thing people have to keep in mind is that having positions in two similar markets is almost the same as having one larger position (p. 308).”

“In trading multiple positions it’s important to pick stocks or commodities that have little correlation and don’t move together (p. 308).”

“For example, corn, crude, sugar, copper, and Swiss francs is a good mix of commodities that will all move independently of each other (p. 308).”

“I also recommend having positions both long and short at the same time as a way to reduce risk (p. 309).”

“When you decide that the time has come to step up your trading, do it slowly (p. 309).”

“Finally, don’t increase your size because you have been winning or losing; this is not the proper time to increase your trading size. This is not smart money management; emotions are making you do it, so avoid (p. 310).”

“The proper way to pyramid is to have the most contracts at the bottom and then, as the trade begins to work, to add fewer and fewer. Thus, if you had started with ten contracts, you’d add seven, and later four, two, and one. This way, when the market turns, you don’t risk nearly as much and can keep most of the early gains. When you do it this way you are building a geometric pyramid with a solid base like the ones they have in Egypt. Image if they had built them the other way around, with the point in the sand. Not only would it have been hard to get to the top, but I don’t think the pyramids would have lasted 4600 years without toppling over (p. 310).”

“Know How Much to Lose – Not only should traders know how much to risk on any trade, they should have a maximum daily loss limit and maybe even a weekly or monthly loss maximum (p. 311).”

“For a complete cutoff point I would say that if you’ve lost more than 30 to 50 percent of your at-risk capital, you are doing something wrong and it’s time to look at what you are doing. Take a break from trading and try to figure what is wrong. If you’ve lost this much, it is probably not by chance, so don’t keep trading (p. 312).”

“Becoming a better trader means making a money management plan and setting up risk parameters. Don’t take this lightly. By having a reasonable risk plan, you increase your chances of making money as a trader (p. 317).”

“One way to ensure that you will survive a losing streak is to risk only half your trading capital and save the other half for a rainy day (p. 317).”

“You also should know in advance that you will risk no more than a small percentage (2 to 5 percent) of your capital on any trade. When you set your risk parameters, you should determine what is the most of any market or market group you will trade at once. Don’t make the mistake of trading the same number of contracts in every market (p. 317).”

“There are many things that can go into your money management plan, but the most important thing is that you make one (p. 318).”

“The second most important thing is that you stick to it. If you have a provision that you will not lose more than $5 per share in a stock, you need to exit that trade when the provision is met or your plan is useless. Without discipline, no trader will succeed, so always focus on staying disciplined to follow your plan (p. 318).”

“4. Never use all your money for trading; keep half for a rainy day (p. 319).”

“16. When pyramiding, start big and add smaller and smaller amounts (p. 319).”

“No matter how many times they say they won’t do it, they keep chasing the market, risk too much, or let losers go past stop levels. They may try hard to improve their trading skills, knowledge of the market, and technical analysis know-how, but unless they concentrate on their discipline, their results will not improve (p. 322).”

“A person who is undisciplined and reckless will find trading much harder than will a person who has very good discipline skills (p. 323).”

“I’d look at the stochastics or a channel line and think that the market was due for a bit of a retracement. Now I know these are low probability trades and so I try not to make them. It is hard sitting out and watching a market move in the direction you think it will, while waiting for a trend to continue, but a disciplined trader will be able to do that. Instead of jumping in, a disciplined trader will wait until the main trend resumes, because that is where the real payoff is (p. 324).”

“He has developed the discipline not to trade until he gets the setup he wants. We all tease him for not trading, but overall he does better than most of us do (p. 324).”

“Though trading can be enjoyable, it takes a lot of hard work (p. 325).”

“It took me about 5 years before I had the discipline not to trade until I had made a good plan, and the reason I did that was that I was trying to raise money to trade with (p. 328).”

“The guys I know who are the best traders also work the hardest; they stay the latest and come in the earliest. They have stable personal lives and believe trading is their business. They don’t take it lightly and do everything possible to succeed. They read the Wall Street Journal and Investors’ Business Daily every day as well as every book available. They are always trying to get any edge they can. They have disciplined themselves to be the best they can be and tend to get rewarded for it (p. 328).”

“Many small traders figure their capital is too small for them to follow a real money management plan and so they ignore it altogether. But money management is for all traders, no matter how big or small they are (p. 330).”

“However, they should get into the habit of knowing where they will get out if the market turns against them, and then of course they must be disciplined enough to do so if it hits that level. Traders need to be disciplined to take a loss (p. 330).”

“… reminding yourself that it is okay to lose a little, you don’t have to make money on every trade, and losses are part of the game (p. 330).”

“Someone who has a short temper, gets moody, and is always at war with the market is directing his attention to the wrong place. It should be focused on trading and nothing else. I have no emotion when I trade, especially when I’m losing big. I just keep quiet about it and keep it to myself without anyone ever knowing how bad it is (p. 331).”

“Learning discipline is one of the hardest things a trader can do, but to succeed, one really needs to work on it (p. 332).”

“There are some people who are disciplined by nature: athletes, musicians, good students, and professional gamblers, among others (p. 333).”

“These are people who work hard and spend the hours they need to spend to become good at what they do. If they can apply their skills to trading, they become good traders (p. 333).”

“Becoming a better trader means, above all, being disciplined enough to do what you are supposed to do. It is one thing knowing how to trade; it’s another actually being able to carry out the steps that can make you successful (p. 334).”

Chapter 17 – The Dangers of Overtrading

“… but one should keep in mind that professional traders normally concentrate on only one market or a select group of markets or stocks. Though big institutional trading houses are well diversified and are involved in practically every market, they typically have different traders for each market. Someone who trades energy does not trade grains, and a cocoa trader does not know or care about what cotton is doing. Someone who trades semiconductor stocks doesn’t trade drug stocks. Even within specific groups top traders may stick to one market. A crude trader, for example, may not trade heating oil; he spends all his time concentrating on crude. The same holds true for floor traders; even though their seats may entitle them to trade all the energies, they normally stay in one pit and don’t jump back and forth. Along with institutional traders, they are focused and are experts in their markets. By keeping things simple they can focus their attention on every minute detail of a market. They know their market inside and out, and coincidentally, they happen to be the top echelon of traders (p. 341).”

“A lot of harm can be done when a trader, his damaged ego, and the power of the Internet get together without supervision (p. 357).”

“Becoming a better trader means remembering that trading is not easy (p. 359).”

“Don’t spread yourself too thin. You can do much better by concentrating on only a few markets than by entering positions everywhere (p. 360).”

“… [not] chasing will cause you to miss many trades, but the ones you enter will be higher probability trades (p. 360).”

“10. Trading at lunchtime (p. 361).

Chapter 18 – The Inner Side of Trading: Keeping a Clear Mind

“If you can keep your head when all about you Are losing theirs and blaming it on you; If you can trust yourself when all men doubt you, But make allowance for their doubting too; If you can wait and not be tired by waiting, Or, being lied about, don’t deal in lies, Or, being hated, don’t give way to hating, And yet don’t look too good, nor talk too wise; If you can dream–and not make dreams your master; If you can think–and not make thoughts your aim; If you can meet with triumph and disaster And treat those two impostors just the same; If you can bear to hear the truth you’ve spoken Twisted by knaves to make a trap for fools, Or watch the things you gave your life to broken… (p. 363).”

“And stoop and build ’em up with worn out tools; If you can make one heap of all your winnings And risk it on one turn of pitch-and-toss, And lose, and start again at your beginnings And never breathe a word about your loss; If you can force your heart and nerve and sinew To serve your turn long after they are gone, And so hold on when there is nothing in you Except the Will which says to them: “Hold on”; If you can talk with crowds and keep your virtue, Or walk with kings–nor lose the common touch; If neither foes nor loving friends can hurt you; If all men count with you, but none too much; If you can fill the unforgiving minute With sixty seconds’ worth of distance run – Yours is the Earth and everything that’s in it, And–which is more–you’ll be a Man my son! (p. 363).”

“Traders who can control their emotions to the point where you can’t tell if they are winning or losing tend to do quite well in the market (p. 366).”

“Lots of traders I know go to the gym at lunchtime for a workout or a swim; it revives them for the afternoon. Some take naps, and some like to play backgammon or video games (p. 367).”

“Trends eventually come to an end no matter how good they are because when everybody in the world is long, who is left to buy? (p. 372).”

“When you are focusing on just one or two markets, bad trades can be cut short more quickly, before they do serious damage (p. 375).”