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Day Trading: Knowing When to Exit a Losing Trade

I am guilty of it; you are guilty of it; the very best traders are guilty of it-sometimes it is very difficult to know when to fold.  There are a plethora of explanations to the irrational desire to hang on to a losing position in the misguided hope that your trade is going to make a dramatic turnaround.  It rarely happens, and most traders end up riding the trade too long and smashing into their stop loss.  The loss is always painful, and most of us (if we can be honest with ourselves) can usually identify a point in the trade where we should have exited with a minor loss.  Yet, we often fail to take advantage of this early exit and incur a substantial loss.


A great deal time and research have been spent on trading, especially the emotional and psychological aspects in trading decisions.  As a group, people have a strong need, and desire, to be right; and in the opposite sense, people have a strong aversion to being wrong.  Bailing out of a potentially disastrous trade is an admission that you, as a trader, have made a bad trading decision.  In short, you were wrong.  No one wants to be wrong. To be sure, I don’t want to be wrong.  Yet, as day traders there is usually a point in a trade were we would be well advised to admit we are wrong and save a bundle of money.  Most day traders seldom avail themselves of the early exit option.

When a trade is obviously going the wrong way it would seem obvious that a wise trader would be anxious to minimize his or her loses.  I have looked at some of my worst trades and been able to accurately pinpoint several exit points that were obvious.  Unfortunately, hindsight is 20/20.  Our emotions control much of our thinking in relation to trading, and once I (or any other trader) is convinced the trade is a good one it is no small task to change your mind quickly and accept that the trade is a terrible one.  As I said earlier, we like to be right; we dislike being wrong, and admitting we are wrong on the selection of a trade often leads to disastrous results.

Many texts and noted authors claim that leaving your emotions on the sideline is absolutely essential for successful trading. I don’t know about you, but my emotions are an integral part of my personality and the notion that I can carte blanch abandon them is wishful thinking, at best.  On the other hand, I do think we, as traders, can learn to minimize our emotions in the trade selection and trade management process.

What is the secret?  There is no secret; but developing the ability to see things as they are rather than as we hope is a skill to be developed.  The market is an emotionless, mechanical device and does not take your emotions into consideration in its day to day operations.  What we, as traders, think is completely irrelevant.  The skill that I work on constantly is seeing the market from a realistic point of view; not my point of view, but what is really going on in the market price action.  Reality can be a very painful teacher, especially when you are on the wrong side of a trade.  But it is reality that we have to work with, and traders must learn to trade from the perspective of what is really occurring in the market, not what we wish the market to do, or how we think the market should move.

In summary, I have noted that removing your emotions from trading is basically wishful thinking.  On the other hand, we can learn to develop a realistic view of how the market is moving and trade accordingly.  It’s no easy task, but with practice reality can become your primary viewpoint, not your wishes.

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Robots, Automated Trading Systems and other Nonsense

I try to keep up with the latest, greatest new innovations in the investing industry and lately I have been seeing a plethora of systems that absolve the trader of trading responsibility and promise that a robot or trading system will heap untold profits on the purchaser of the system.  Even better, you can be the proud owner of one of these robotic systems for a mere $239.

My initial thought was, “why have I spent a lifetime learning about trading when all I had to do was plunk down $239 and sit back and count my fortunes?”  More to the point, why hasn’t Wall Street dumped the army of traders and strategist and simply installed a robot and reap trillions from an unsuspecting market?

A quick Google search on one of the brand name robots yields pages of favorable reviews on the merits of the products, though I didn’t recognize any of the individuals reviewing the robotic software.

I did, however, find some reputable reviews from respectable and well known sources and their conclusions were much what I expected.  In short, keep your $239.  The performance of these trading robots was dismal, at best.  And this makes sense, when you think about it.  Who in their right mind would be selling a product that can make hundreds of thousands of dollars and then turn around and sell it for $239? In short, if I had a goose that laid golden eggs I sure wouldn’t be hawking it on the internet for a couple of hundred bucks.  To be sure, if I had a goose that laid golden eggs the only individual that would know about it is ME.

But automated systems and trading robots are indicative of a trend that I have noticed developing in recent years.  Let’s face it; trading is difficult and risky, plus the learning curve is very steep and expensive.  Many would be traders would like to skip the treacherous indoctrination phase of trading and jump straight to the phase where you consistently make money.  And who can blame them?  It is only human nature to take the path of least resistance.

There is a problem in this thinking, though.  You have to pay your dues. In order to trade effectively you have to learn to trade.  Learning to trade is a frustrating, knuckle-biting, anger-inducing process and not for the faint of heart.  Further, there are no real shortcuts to learning to trade…short of learning to trade.

Of course, the good news is that once you have developed the ability to consistently trade profitably it is a skill that you have learned for life.  There are no shortcuts, so save your $239 you would have spent on a trading robot and buckle down to the business of learning to trade.

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Do You Know the Commodity Channel Index?

The Commodity Channel Index has become, in recent years, a very popular index and used for a variety of trading purposes.  In my trading, I use the Commodity Channel Index (CCI) to indicate potential buy/sell decisions and, more importantly, to identify areas of market noise.  It is especially important to avoid trading in periods of market noise because the market is generally without a trend and engaged in normal backing and filling operations.  I like to trade with the trend, and that should come as no particular revelation to most traders.  Quite simply, your chances of succeeding when trading with the trend are significantly higher than trying to pick out retracements and market swings.

The Commodity Channel Index is not a particularly new indicator; it been around for quite some time.  Donald Lambert initially introduced the Commodity Channel Indicator in 1980, and variations and trading methodologies using the indicator have increased exponentially since it’s original inception.

From a semantic standpoint, the Commodity Channel Index is misnamed; it is actually a momentum oscillator and should be used as such.  It is a great primary indicator, but should always be used in conjunction with another technical analysis method.  That specific method could be a corroborating oscillator, or a rate of change indicator, or even volume analysis.  The point is a simple one; don’t go it alone with the Commodity Channel Indicator as it doesn’t give you a complete analysis of what is actually occurring in the market.

There are three lines that are of importance on a typical CCI chart.  The zero line indicates a general area of market equilibrium, and the +100 and -100 line indicate potential overbought and oversold conditions.  As I mentioned earlier, there are a variety of methods developed by trading innovators to utilize the CCI, and many are dissimilar in their market indications and methodology.  To be sure, it is essential to be familiar with a specific method of analysis before jumping into live trading using the Commodity Channel Indicator.

One of the potential problems many traders experience is the tendency of the CCI to whipshaw traders in and out of trades.  It is not uncommon, especially in low volume trending markets for the CCI to oscillate along the overbought or oversold lines.  In these situations, the CCI line hovers around the +100 and -100 lines for extended periods of time.  It is important for traders to identify this phenomena early on because the indications from the CCI will have you bouncing in and out of the market and depleting your trading account.

On the other hand, there are times when the CCI gives some of the clearest entry and exit signals you will experience.  It takes time and experience to learn the nuances of this indicator and I don’t recommend jumping headlong into CCI use without proper preparation. There are a number of excellent books written about the use of the CCI and the internet is loaded with all sorts of potential CCI trading systems.  Of course, I would recommend carefully evaluating each system before implementation, as some systems are much better than others.

That being said, I feel the E-mini Trading Professor utilizes the CCI in a superior methodology and provides excellent buy/sell signals.

Day Trading: It’s the Price Action

Countless numbers of day traders spend their time and money searching for that magic indicator that will unlock the secret of trading profits. To be sure, I have seen aspiring traders purchase trading program after trading program in search of the new indicator that will send their their trading profits soaring. Unfortunately, no such indicator exist and it is unlikely that a magical indicator will be developed that can revolutionize profits for the e-mini day trader.

On the other hand, thousands of e-mini day traders successfully trade every day without any wondrous and magical indicator. Of course, it would be much more convenient to have an indicator that unlocks the secrets of e-mini trading. To date though, we are far from developing any such trading tool. So that leaves us with the trading tools we have at hand, and there certainly is no shortage of indicators for the e-mini trader to utilize. The question remains, though, which indicators are the best ones to utilize?

While some indicators claim to be leading indicators, that is to say that they have a predictive quality in their results, the evidence suggests that this predictive quality is sketchy, at best. Most indicators are lagging indicators and indicate the status of current trends based upon recent history. As any good trader knows, recent history can be helpful, but the market contains a random element that can easily deviate from past history. We are left with indicators that give us, at best, an educated guess as to the path the market price action will take in the near term future. In short, short-term trading can be a rather inexact science, at best.

One important aspect of trading is often overlooked by traders who depend solely upon indicators and oscillators to time their trades. In my world, price action is the driving force in my trade selection. While I do employ oscillators and indicators, their purpose is primarily to confirm potential trades I spot by observing price action. I pay careful attention to support and resistance, volume, and price movement in choosing my trades. Obviously taking trades into known resistance or support it is risky business, at best. Unfortunately, strict oscillator and indicator traders do not have a handle on where or support and resistance may lie and often blindly take indicator or oscillator indicated trades into these danger zones.

Further, price movement and price analysis can give a trader a unique view in which the market functions. Specifically, I analyze each bar and note whether the bars make higher highs and higher lows. Conversely, I am also interested in the opposite price action, and that is whether the bars are making lower highs and lower lows. Each of these price formations can be indicative of potential market moves in their respective directions. From there, I can have a good look at my oscillators and indicators to determine the strength and velocity of these potential moves and decide whether or not the trade is a high probability or low probability trade.

Price action, along with support and resistance and volume, are often overlooked in trade selection. But learning to actually read price action will give any trader a much better understanding of what is actually happening in the market and provide the trader with insight into high probability trades and conversely, help him or her avoid low probability trades. Very few traders are excited about entering low probability trades and seek to avoid them at all costs. It is my contention that ignoring price action and relying strictly upon oscillators and indicators will often lead traders into low probability trades.

A second common mistake made by oscillator traders is the failure to recognize the trend in the market. Regardless of whether the oscillator or indicator being used indicates a nice trade, if it is against the trend you will often find yourself on the losing side of the trade. From a statistical standpoint, a trend is likely to resume (after a short retracement) 80% of the time. Obviously, trading with the trend is a habit all traders should cultivate. The only way to truly ascertain whether or not the market is trending is by observing the price action and subsequent retracements.

In summary, we have stressed the importance of observing price action and the benefits price action has to offer traders. Trends, retracements, and then market noise can all be identified very easily by observing price action. We have also noted that strict oscillator trading can often lead a trader into low probability trades, which should be avoided. Watch the price action and you’re trading will improve immeasurably.

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